Revenue Recognition Chapter 6 10th Edition Test Bank Answers - Answer Key + Test Bank | Intermediate Accounting 10e by J. David Spiceland, Mark W. Nelson, Wayne Thomas. DOCX document preview.
Intermediate Accounting, 10e (Spiceland)
Chapter 6 Revenue Recognition
1) Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
Difficulty: 1 Easy
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
2) Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services.
Difficulty: 2 Medium
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
3) "Determine whether it is probable the seller will collect the consideration it is entitled to receive" is one of the five steps to applying the core revenue recognition principle.
Difficulty: 2 Medium
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
4) Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition.
Difficulty: 1 Easy
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Reporting / Keyboard Navigation
5) A transfer of goods or services is complete when the customer has control over the goods or services.
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
6) Revenue always is recognized once the buyer has physical possession of goods.
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
7) Sellers should recognize revenue over time for a long-term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled.
Difficulty: 2 Medium
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
8) A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job.
Difficulty: 1 Easy
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
9) Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed.
Difficulty: 1 Easy
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
10) A common output method used to measure progress towards completion is to determine the proportion of promised goods or services that have been transferred to date.
Difficulty: 1 Easy
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
11) No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time.
Difficulty: 1 Easy
Topic: Revenue over time―Progress to completion
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
12) The transaction price should be allocated to the contract's performance obligations in proportion to the stand-alone selling prices of the performance obligations.
Difficulty: 1 Easy
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
13) No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time.
Difficulty: 1 Easy
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
14) If the contract contains multiple performance obligations, revenue must be recognized in an amount equal to the fair value of each of the separate performance obligations.
Difficulty: 1 Easy
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
15) The transaction price is only allocated to goods or services that are both capable of being distinct and that are separately identifiable.
Difficulty: 1 Easy
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
16) Goods or services are distinct if they are either capable of being distinct or are separately identifiable.
Difficulty: 1 Easy
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
17) A contract between a seller and a buyer need not be in writing to be enforceable.
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
18) If the contract is not in writing, revenue cannot be recognized, even though goods have been transferred and payment is expected to be received in exchange.
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
19) The probability that the customer will pay the seller does not affect whether a contract exists for purposes of revenue recognition.
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
20) A contract exists for purposes of revenue recognition if either the seller or customer has performed an obligation specified by the contract.
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
21) An option for a customer to purchase additional goods at a discount from list price is only a performance obligation if the discount is a material right that the customer would not receive otherwise.
Difficulty: 1 Easy
Topic: Contract features―Customer options
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
22) A warranty that the customer can purchase separately and that covers a long period of time after the purchase date is likely to be a quality-assurance warranty.
Difficulty: 1 Easy
Topic: Contract features―Warranties
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry / Keyboard Navigation
23) If an option to purchase an extended warranty at a special discount is included with a product when the product is purchased, a portion of the contract price needs to be allocated to the option.
Difficulty: 1 Easy
Topic: Contract features―Warranties
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
24) A fee for recording a new customer in the seller's information system should be treated as a separate performance obligation and should be recognized upon payment.
Difficulty: 2 Medium
Topic: Contract features―Prepayments
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
25) An option for a customer to purchase additional goods at a discount from list price is always a performance obligation, because it confers a material right.
Difficulty: 2 Medium
Topic: Contract features―Customer options
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
26) Accounting for quality-assurance warranties includes a credit to warranty expense and a debit to contingent liability.
Difficulty: 2 Medium
Topic: Contract features―Warranties
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
27) When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence.
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
28) To account for variable consideration using the most likely amount, the probability of each possible amount is multiplied by the possible amount to get an expected contract price.
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
29) If the estimate of a transaction price is revised, the price change is allocated entirely to the remaining performance obligations that are yet to be satisfied.
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
30) The amount of variable consideration that can be recognized is limited to the amount for which it is probable that there won't be a significant reversal of revenue recognized to date when uncertainty resolves in the future.
Difficulty: 1 Easy
Topic: Transaction price―Variable consid constraint
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
31) The right of return is a separate performance obligation, and a portion of the transaction price needs to be allocated to it for revenue recognition.
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
32) When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
33) If the seller is a principal, the seller has primary responsibility for delivering a product or service.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
34) If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
35) If the seller is a principal, the seller typically is vulnerable to risks associated with returns of inventory from the customer.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
36) If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
37) If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal / Keyboard Navigation
38) If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
39) The transaction price should be adjusted to reflect the time value of money for interest payable, but not for interest receivable.
Difficulty: 1 Easy
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
40) Sellers are only required to adjust the transaction price to reflect the time value of money when the contract has a significant financing component.
Difficulty: 1 Easy
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
41) If the seller is paid prior to delivery of goods or services and the time value of money is viewed as significant, the seller subsequently will recognize interest expense.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
42) If the seller is paid after delivery of goods or services and the time value of money is viewed as significant, the seller subsequently will recognize interest expense.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
43) If the time value of money is viewed as significant and the seller recognizes deferred revenue, the seller subsequently also will recognize interest expense.
Difficulty: 3 Hard
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
44) If a seller makes payments to a customer to purchase goods or services, and those payments are equal to the stand-alone selling prices of those goods or services, part of those payments are a refund to the customer.
Difficulty: 1 Easy
Topic: Transaction price―Pay by seller to customer
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
45) The adjusted market assessment approach can be used to estimate the stand-alone selling price of a good or service.
Difficulty: 1 Easy
Topic: Transaction price―Adjusted market approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
46) The residual approach to estimate stand-alone selling prices is often used for goods or services that are sold separately and that have stable prices.
Difficulty: 2 Medium
Topic: Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
47) Revenue typically should not be recognized when payment is received but the goods are warehoused at the seller's facility.
Difficulty: 1 Easy
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
48) In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods to the end user.
Difficulty: 1 Easy
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
49) In franchise arrangements, the franchisor's performance obligations are not separately identifiable, so revenue must be recognized over time.
Difficulty: 1 Easy
Topic: Timing of rev rec―Franchises
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
50) The same revenue recognition requirements always apply to franchise arrangements that apply to other selling arrangements.
Difficulty: 1 Easy
Topic: Timing of rev rec―Franchises
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
51) In a consignment arrangement, revenue typically should not be recognized until sale to a third party occurs, even though there has been a physical transfer of goods to the consignee, because the consignor still retains legal title to the goods.
Difficulty: 1 Easy
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
52) Sellers recognize revenue for gift cards at the point in time control of the gift card is transferred to the customer.
Difficulty: 1 Easy
Topic: Timing of rev rec―Gift cards
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
53) If a license is acquired to use intellectual property for a 5-year period, revenue always is recognized at the point in time the customer begins to benefit from the license.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
54) If a licensee benefits from the seller's activity over the license period with respect to the licensed intellectual property, revenue should be recognized over time.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
55) Under U.S. GAAP, if a license gives a customer access to symbolic intellectual property, revenue always should be recognized over time.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.; 06-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to revenue recognition.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
56) Under IFRS, if a license gives a customer access to symbolic intellectual property, revenue always should be recognized over time.
Difficulty: 2 Medium
Topic: IFRS―Revenue recognition
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.; 06-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to revenue recognition.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
57) If a license gives a customer access to functional intellectual property, revenue always should be recognized at the point in time that the customer can begin using the intellectual property.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
58) A license to use a company trademark should be viewed as an access right, with revenue recognized over the license period.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
59) Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.
Difficulty: 1 Easy
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
60) An account receivable is recognized if the seller has a conditional right to receive payment.
Difficulty: 1 Easy
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
61) Disclosure notes to the financial statements regarding significant revenue recognition policies are only required when they will not reveal important information to competitors, suppliers or customers.
Difficulty: 1 Easy
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
62) When recognizing revenue over time on a long-term contract, amounts billed and the cash actually received affect income recognition.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
63) When recognizing revenue over time on a long-term contract, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.
Difficulty: 1 Easy
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
64) Firms have free choice as to whether to recognize revenue over time or at a point in time to account for a long-term contract.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
65) When revenue is recognized over time versus upon completion of the contract, different amounts of total profit or loss are recognized for a particular contract.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
66) Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of whether revenue is recognized over time or upon contract completion.
Difficulty: 1 Easy
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
67) When a long-term contract does not qualify for revenue recognition over time, all gross profit and loss recognition occurs when the contract is completed.
Difficulty: 2 Medium
Topic: Long-term contracts―Accounting issues; Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
68) Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.
Difficulty: 1 Easy
Topic: Chapter Supp―Realization principle
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
69) Under IFRS, one of the conditions for revenue from product sales to be recognized is when the risks and rewards of ownership have been transferred to the customer.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
70) Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.
Difficulty: 1 Easy
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
71) When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.
Difficulty: 1 Easy
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
72) Use of the installment sales method indicates little uncertainty about collection of the receivable.
Difficulty: 1 Easy
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
73) Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment sales method and the cost recovery method.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
74) When the right of return exists and a seller cannot make reliable estimates of future returns, the installment sales method can be used.
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
75) Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term construction contract.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
76) For long-term construction contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.
Difficulty: 2 Medium
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
77) When the cost recovery method is used to account for a long-term construction contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
78) Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term construction contract.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
79) Revenue from the sale of computer software is always recognized at the point of sale.
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
80) Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
81) Vendor-specific objective evidence of separate sales prices is required for multiple-element software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
82) Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
83) Initial franchise fees are always recognized on the date they are received.
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
84) When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.
Difficulty: 2 Medium
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
85) When accounting for multiple-element arrangements, GAAP indicates that sellers can separately record revenue for part of an arrangement even if the part does not have value to the customer on a stand-alone basis.
Difficulty: 2 Medium
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
86) IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
87) Companies recognize revenue only when:
A) A contract is reasonably likely to exist.
B) A performance obligation is designated in a written contract.
C) A written contract is in place and payment is variable.
D) Control over goods or services has been transferred from the seller to the customer.
Difficulty: 2 Medium
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
88) Which of the following is one of the steps for recognizing revenue?
A) Identify the performance obligations of the contract.
B) Determine whether bad debts can be reasonably estimated.
C) Estimate the total transaction price of the contract based on fair value.
D) Allocate all revenue to the performance obligation with the largest stand-alone selling price.
Difficulty: 1 Easy
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
89) Which of the following is not one of the five steps for recognizing revenue?
A) Recognize revenue when (or as) each performance obligation is satisfied.
B) Determine the transaction price.
C) Allocate the transaction price to each performance obligation.
D) Estimate variable consideration.
Difficulty: 1 Easy
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
90) Which one of the following is not one of the five steps for recognizing revenue?
A) Identify the contract with a customer.
B) Recognize revenue when all the performance obligations have been satisfied.
C) Identify the separate performance obligation(s) in the contract.
D) Allocate the transaction price to the separate performance obligations.
Difficulty: 2 Medium
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-01 State the core revenue recognition principle and the five key steps in applying it.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
91) For a typical manufacturing company, the most common critical point for recognizing revenue is the date:
A) An order is received.
B) Production is completed.
C) The product is delivered.
D) Payment is received.
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
92) Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer?
A) Buyer has scheduled delivery.
B) Buyer has a strong credit history, such that bad debts are reasonably estimable.
C) Buyer has not scheduled delivery.
D) Buyer has assumed the risk and rewards of ownership.
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
93) Which of the following is not an indicator that the customer is likely to have control over a good?
A) Asset warehoused by seller-affiliated third party
B) Accepted the asset
C) Legal title to the asset
D) Physical possession of the asset
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
94) On June 1st, Lucy & Bros received an order for 500 cupcakes. Lucy delivered the cupcakes to the client on June 25th. A $50 deposit was received on June 5th and the remaining $450 was paid on June 30th. Lucy likely would recognize revenue on:
A) June 1st
B) June 5th
C) June 25th
D) June 30th
Difficulty: 1 Easy
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
95) The core revenue principle states that:
A) Companies recognize revenue when the earnings process is virtually complete and it is probable that payments will be received.
B) Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.
C) Companies recognize revenue when goods or services are transferred to the customer and payments are received.
D) Companies recognize revenue when the goods or services are transferred to the customer in an arm's length transaction.
Difficulty: 1 Easy
Topic: Core principle and 5 steps to apply it
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
96) Consider the following three scenarios:
I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st,
and received payment of $500 for those services.
II. On June 1st, Melly Corp received payment for 100 pounds of raw material
to be delivered to Drake Inc. in 6 months.
III. Lodo, LLC collected cash on June 1st for services rendered on May 1st.
Given these scenarios, revenue cannot be recognized on June 1st for:
A) I, II
B) I only
C) II, III only
D) III only
Difficulty: 2 Medium
Topic: Transfer of control and indicators
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
97) Which of the following is not an indicator that revenue can be recognized over time?
A) The seller is enhancing an asset that the buyer controls as the service is performed.
B) The customer consumes the benefit of the seller's work as the seller performs the service.
C) The seller is creating an asset that has an alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
98) Revenue likely is recognized over time for all the following arrangements except for
A) Bank earning interest on a long-term loan.
B) Construction of a building.
C) Providing a two-year gym membership.
D) Manufacturing generally stocked items ordered by a favored customer.
Difficulty: 1 Easy
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
99) On November 1, 2021, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2022. Taylor should recognize revenue in 2021 in the amount of
A) $0.
B) $800.
C) $2,400.
D) $4,800.
Difficulty: 1 Easy
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
100) Mary signed up and paid $1200 for a 6-month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet's accounting records would indicate:
A) $400 of revenue, $800 of accounts receivable
B) $400 of revenue, $800 of deferred revenue
C) $1,200 of revenue, $1,200 of cash
D) $800 of revenue, $400 of accounts receivable
Difficulty: 2 Medium
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
101) On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized?
A) At a point in time (February 1st)
B) At a point in time (March 15th)
C) At a point in time (March 31st)
D) Over time
Difficulty: 2 Medium
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
102) Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2021, the job is 80% complete. How much revenue should Rothbart recognize in 2021 for this contract?
A) $0
B) $12,000
C) $48,000
D) $60,000
Difficulty: 3 Hard
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
103) Which of the following is not a characteristic of a distinct good or service?
A) It can be used on its own or in combination with other goods or services the seller could obtain elsewhere.
B) It is not highly dependent on other goods or services in the contract.
C) It has a stand-alone selling price.
D) It is not interrelated with other goods or services in the contract.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
104) For contracts that include more than one separate performance obligation:
A) Revenue is recorded over time at the fair value of each performance obligation.
B) Revenue is recognized in the amount of the contract price on the date the last separate performance obligation is satisfied.
C) The contract price is allocated to each performance obligation in proportion to the obligations' stand-alone selling prices.
D) Revenue is recognized in the amount of the contract price on the date the contract is signed.
Difficulty: 1 Easy
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
105) Binz Company provides cleaning services and sells garbage bins to office clients. On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true?
A) Revenue for the garbage bins and the cleaning services must be recognized on June 1st.
B) Revenue for the garbage bins is recognized on June 1st and no revenue will be recognized for the cleaning services until the end of the 5th year.
C) Revenue for the garbage bins is recognized on June 1st and revenue for the cleaning service is recognized over the 5 years as those services are performed.
D) Binz Company should not recognize any revenue until the end of the 5th year.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
106) Goods or services are capable of being distinct if:
A) The seller regularly sells the good or service separately.
B) A buyer could use the good or service on its own.
C) A buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere.
D) The seller regularly sells the good or service separately, or the buyer could use the good or service on its own, or the buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
107) Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly?
A) $1,000
B) $870
C) $725
D) $30
Difficulty: 3 Hard
Topic: Mult perf oblig―Allocate transact price; Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
108) On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date.
How many performance obligations exist in this contract?
A) 0
B) 1
C) 2
D) 3
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
109) On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2021 for this contract?
A) $0
B) $63,000
C) $74,250
D) $90,000
Difficulty: 3 Hard
Topic: Mult perf oblig―Allocate transact price; Mult perf oblig―When (or as) satisfied
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
110) On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date.
Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2021 for this contract?
A) $0
B) $37,500
C) $63,000
D) $90,000
Difficulty: 3 Hard
Topic: Mult perf oblig―When (or as) satisfied
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
111) A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when:
A) The seller believes it is not probable that it will collect the amount it's entitled to receive under the contract.
B) The seller and buyer did not sign a formalized written contract.
C) The seller and buyer can terminate the contract without penalty and neither has performed any obligations under the contract.
D) The seller believes it is highly likely but not certain that the buyer will agree to the terms of the contract.
Difficulty: 1 Easy
Topic: Contract features―General items
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
112) Which of the following is a characteristic of a contract for purposes of revenue recognition?
A) Commercial substance.
B) Nonverbal.
C) Reasonable profit margin.
D) Notarized within the company's state of incorporation.
Difficulty: 1 Easy
Topic: Contract features―General items
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
113) Waldman Associates received a written, approved contract to deliver economic consulting services, with service and payment commencing in one month. The contract specifies the services that Waldman is to perform, and the payment terms. Waldman and the customer both can cancel the contract without penalty prior to commencing service. Does Waldman have a contract for purposes of revenue recognition on the day the contract is received?
A) Yes, because Waldman has a written approved contract.
B) No, because Waldman and the customer can cancel without penalty, and neither has performed an obligation under the contract.
C) Maybe, depending on whether Waldman can estimate collectability of the receivable.
D) There is insufficient data on which to base an answer.
Difficulty: 1 Easy
Topic: Contract features―General items
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
114) What is the effect of bad debts on revenue recognition?
A) The seller must believe it is probable it will collect the amounts it is entitled to collect.
B) Bad debts must be of a remote likelihood in order to recognize revenue.
C) Bad debts are deducted from revenue to calculate net revenue on the income statement, similar to sales returns.
D) Bad debts are ignored when determining whether to recognize revenue, but recognized as an expense on the income statement.
Difficulty: 2 Medium
Topic: Contract features―General items
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
115) Which of the following is considered a performance obligation?
A) Up-front registration fees for a gym membership
B) Extended warranties on electronic products
C) Quality-assurance warranties on electronic products
D) A processing fee to obtain a bank loan
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
116) Which of the following is not a performance obligation?
A) A good that the seller could sell separately and that is separately identifiable from other goods or services in the contract.
B) A right of return.
C) An option for a customer to purchase goods under terms that are more advantageous than those enjoyed by other customers.
D) An extended warranty.
Difficulty: 1 Easy
Topic: Contract features―Identify the contract
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
117) Which of the following is an example of an extended warranty?
A) Fancy Headphones, Inc. provides assurance that its headphones are defect-free after purchase.
B) Azalea's Flowers assures clients that its flowers will stay fresh for at least a week.
C) Mark Electronics offers a warranty at an affordable price that provides additional protection after the customer takes possession of the product.
D) Erickson Electronics promises to make repairs or replace any product found to be defective within a week of purchase.
Difficulty: 1 Easy
Topic: Contract features―Warranties
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
118) Orange Inc. offers a discount on an extended warranty on its oPhone when the warranty is purchased at the time the oPhone is purchased. The warranty normally has a price of $150, but Orange offers it for $120 when purchased along with an oPhone. Orange anticipates a 75% chance that a customer will purchase the extended warranty along with the oPhone. Assume Orange sells to 1,000 oPhones with the extended warranty discount offer. What is the total stand-alone selling price that Orange would use for the extended warranty discount option for purposes of allocating revenue among the performance obligations in those 1,000 oPhone contracts?
A) $0
B) $22,500
C) $30,000
D) $120,000
Difficulty: 3 Hard
Topic: Contract features―Warranties; Transaction price―Variable consideration
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.; 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
119) In which of the following is the option described not a performance obligation?
A) Customers accumulate points for every dollar spent at Madeline's Book Store. The points can be redeemed for books once certain levels are met.
B) Customers can get 5% cash back for every $100 spent on eco-friendly products.
C) Customers can "buy two, get one free" at a menswear store.
D) Upon purchase of any name-brand TV, customers can purchase a 5-year extended warranty at a 25% discount.
Difficulty: 2 Medium
Topic: Contract features―Customer options
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
120) Verma, Inc. sells office furniture. In 2021, it sold 200 desks for $500 each. For each desk sold, Verma distributed a 50% discount coupon for purchase of an office chair within one month. Based on historical experience, Verma expects that approximately 20% of the coupons will be utilized. The chairs purchased with the coupons are priced at $150 and normally discounted 10%. What would be the stand-alone sales price used by Verma for the coupon when allocating the $500 transaction price to performance obligations?
A) $0
B) $12
C) $15
D) $75
Difficulty: 2 Medium
Topic: Contract features―Customer options
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
121) Which of the following statement is most true?
A) Variable consideration means that the transaction price is uncertain.
B) Basing an estimate on the most likely amount is always superior to basing an estimate on the expected value.
C) The most likely estimated amount is estimated by multiplying the possible amounts with their respective probability of occurrence.
D) When the transaction price is uncertain, revenue should not be recognized.
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
122) Which of the following is an example of a variable consideration?
A) John is expected to receive $100 for his tutoring services provided that he keeps track of his hours.
B) Melody's Piano will get paid for the 50 pianos sold provided that the pianos are non-defective after the customer takes control.
C) Cantankerous Computers gets paid a base amount for every repair plus an additional hourly fee of $10.
D) Excellent Electronics has a 10% mail-in rebate program for the Model X-001 speaker system. The company sold $10,000 worth of systems and believes there is a 50% chance that rebates will be redeemed.
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
123) Which of the following is correct about changes in estimated variable consideration?
A) Changes in estimated variable consideration should be recognized as an adjustment to revenue in the period the change in estimate is made.
B) Changes in estimated variable consideration should be applied retroactively to all periods affected.
C) Changes in estimated variable consideration should be allocated retrospectively to all prior periods.
D) Changes in estimated variable consideration are not recognized in periods after transaction price is first estimated.
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
124) On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the expected value?
A) $4,750
B) $5,000
C) $5,500
D) $5,750
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration; Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
125) On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.
What is the expected transaction price with variable consideration estimated as the most likely amount?
A) $4,750
B) $5,000
C) $5,500
D) $5,750
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
126) Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
A) $1,000
B) $1,333
C) $1,400
D) $1,200
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
127) Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the expected value. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
A) $1,000
B) $1,333
C) $1,400
D) $1,200
Difficulty: 3 Hard
Topic: Transaction price―Variable consideration; Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
128) Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?
A) Debit of $1,000
B) Debit of $334
C) Credit of $1,000
D) Credit of $334
Difficulty: 3 Hard
Topic: Transaction price―Variable consideration; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
129) On June 1, 2021, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2021. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the expected value. How much revenue should Emmet recognize on this contract in 2021?
A) $25,000
B) $26,125
C) $28,750
D) $50,000
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration; Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
130) On June 1, 2021, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2021. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2021?
A) $25,000
B) $26,125
C) $28,750
D) $50,000
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
131) On June 1, 2021, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2021. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
Assume that Emmet accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Emmet revises its estimate of the chance the building will exceed the 90% occupancy threshold to a 70% chance. What is the total amount of revenue Emmet should recognize on this contract in November of 2021?
A) $3,125
B) $4,167
C) $4,792
D) $7,291
Difficulty: 3 Hard
Topic: Transaction price―Variable consideration; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
132) Which of the following is not an indicator that the constraint on recognizing variable consideration should be applied?
A) Poor (limited) evidence on which to base an estimate
B) A broad range of outcomes that could occur
C) A short delay before uncertainty resolves
D) A history of the seller changing payment terms on similar contracts
Difficulty: 1 Easy
Topic: Transaction price―Variable consideration; Transaction price―Variable consid constraint
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
133) On January 1, 2021, Elite Advertising was contracted to run a marketing campaign for Pharm King's new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that "If you forced me to make an estimate, I'd say we have a 50/50 chance. But don't quote me on that – it's really too early to tell." Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2021?
A) $50,000
B) $51,250
C) $52,500
D) $57,500
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration; Transaction price―Variable consid constraint
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
134) Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:
A) When Boomerang delivers a computer to a customer, ignoring potential returns.
B) When Boomerang delivers a computer to a customer, in an amount that is reduced by the expected returns.
C) When Boomerang receives cash from the customer.
D) When a customer returns a computer.
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
135) Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing revenue associated with one of these sales?
A) No time delay, recognize revenue upon delivery.
B) Gunk should recognize revenue as cash is received.
C) Gunk should defer revenue recognition until costs are recovered.
D) Three years, after the right of return has expired.
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
136) When a seller offers a right of return, which of the following is true?
A) Sales are shown net of estimated returns in the income statement.
B) Sales are shown net of only actual returns in the income statement.
C) Sales are shown gross of returns, as returns are treated as an expense.
D) Sales are shown gross of returns, as returns are ignored for purposes of income statement presentation.
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
137) CatManDoo sold 4,500 bags of kitty litter during the month of June at a price of $10/bag. The company offers a full refund to unsatisfied customers for any product returned within 30 days from the date of purchase. Based on historical experience, Aria expects that 2% of sales will be returned. How much revenue should CatManDoo recognize in June?
A) $45,900
B) $45,000
C) $44,900
D) $44,100
|
|
|
|
|
|
Revenue | $ | 45,000 |
| ($10 × 4,500 bags) | |
Sales returns |
| 900 |
| ($45,000 × 2%) | |
Net revenue | $ | 44,100 |
|
| |
Difficulty: 1 Easy
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
138) Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?
A) The seller hasn't previously sold the product and hasn't determined a price for it.
B) The seller provides the product bundled with other goods or services.
C) The seller does not have competitors from which to observe market prices of similar products.
D) The seller is unable to accurately estimate variable consideration associated with the contract.
Difficulty: 1 Easy
Topic: Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
139) Which of the following is not an approach for estimating stand-alone selling prices?
A) Adjusted market assessment approach
B) Expected cost plus margin approach
C) Residual approach
D) Fair market appraisal approach
Difficulty: 1 Easy
Topic: Transaction price―Adjusted market approach; Transaction price―Residual approach; Transaction price―Expected cost plus margin
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
140) Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the adjusted market assessment approach.
A) $50
B) $80
C) $90
D) $97.50
Difficulty: 1 Easy
Topic: Transaction price―Adjusted market approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
141) Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the expected cost plus margin approach.
A) $50
B) $80
C) $90
D) $97.50
Difficulty: 1 Easy
Topic: Transaction price―Expected cost plus margin
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
142) Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.
Estimate the stand-alone selling price of the software using the residual approach.
A) $50
B) $80
C) $90
D) $97.50
Difficulty: 1 Easy
Topic: Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
143) Which of the following does not apply to a seller who is a principal?
A) Has control over goods or services
B) Primarily responsible for providing goods or services to customer
C) Exposed to risks associated with holding inventory
D) Primary performance obligation is to facilitate the transfer of goods or services
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal; FN Measurement / Keyboard Navigation
144) Which of the following applies to a seller who is an agent?
A) Warehouses inventory
B) Liable for the delivery of goods or services to the client
C) Charges a commission for each transaction
D) Records revenue at full transaction price
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal; FN Measurement / Keyboard Navigation
145) Explodia.com sells fireworks over the Internet. Customers access Explodia's website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?
A) Explodia is an agent in this transaction.
B) Explodia is primarily responsible for providing the product to the customer.
C) Explodia's income statement would report gross revenue and cost of sales associated with these transactions.
D) Explodia warehouses inventory.
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
146) Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contacts Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing's income statement would include the following with respect to this transaction:
A) Revenue of $1,500
B) Revenue of $1,500, and cost of services of $1,125
C) Revenue of $375
D) Revenue of $1,875 and cost of services of $1,500
Difficulty: 1 Easy
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
147) Assume a contract for the sale of goods specifies that payment is to be made four months after delivery of a product. The seller is likely to do which of the following, with respect to the time value of money over the life of the contract?
A) Recognize interest expense.
B) Recognize interest revenue.
C) Recognize additional cost of goods sold.
D) Ignore the time value of money.
Difficulty: 1 Easy
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
148) Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
A) Recognize interest expense.
B) Recognize interest revenue.
C) Recognize additional cost of goods sold.
D) Ignore the time value of money.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
149) Assume a contract for the sale of goods specifies that the seller will receive cash 20 months after delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
A) Recognize interest expense.
B) Recognize sales revenue for an amount that is less than the cash eventually received.
C) Recognize additional cost of goods sold.
D) Ignore the time value of money.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
150) Gaur sells Jensen equipment under an arrangement whereby Gaur delivers the equipment on January 1, 2021 and receives payment on June 30, 2022. When delivery of the equipment occurs, Gaur will record a journal entry that includes:
A) Debit to discount on notes receivable.
B) Credit to sales revenue.
C) Debit to cash.
D) Credit to notes receivable.
|
|
|
Notes receivable | xxx |
|
Discount on notes receivable |
| xxx |
Sales revenue |
| xxx |
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
151) Davis sells Weber equipment under an arrangement whereby Davis delivers the equipment on January 1, 2021 and receives payment on June 30, 2022. When subsequent payment occurs, Davis will record a journal entry that includes:
A) Credit to discount on notes receivable.
B) Credit to sales revenue.
C) Credit to cash.
D) Credit to interest revenue.
|
|
|
Cash | xxx |
|
Discount on notes receivable | xxx |
|
Interest revenue |
| xxx |
Notes receivable |
| xxx |
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
152) Assume a contract for the sale of goods specifies that cash is collected 19 months prior to delivery of a product. The seller is likely to do which of the following with respect to the time value of money?
A) Recognize interest expense upon receipt of payment.
B) Recognize sales revenue for an amount that is less than the cash received.
C) Debit deferred revenue when delivery occurs.
D) Debit notes receivable upon receipt of payment.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
153) Doug sells Nina equipment under an arrangement whereby Doug receives cash on January 1, 2021 and delivers the equipment on June 30, 2023. When delivery of the equipment occurs, Doug will record a journal entry that includes:
A) Credit to deferred revenue.
B) Credit to interest revenue.
C) Debit to cash.
D) Credit to sales revenue.
Interest expense | xxx |
|
Deferred revenue | xxx |
|
Sales revenue |
| xxx |
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
154) Dana sells White equipment under an arrangement whereby Dana receives cash on February 23, 2021 and delivers the equipment on August 30, 2023. When the cash is received, Dana will record a journal entry that includes:
A) Credit to deferred revenue.
B) Credit to interest revenue.
C) Debit to notes receivable.
D) Credit to sales revenue.
Cash | xxx |
|
Deferred revenue |
| xxx |
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
155) Lewis sells goods to Dean in a transaction for which the time value of money is viewed as significant. The goods have a fair value of $10,000, and Lewis receives a total of $8,000 cash in full payment, consistent with the sales contract. From this information we can infer that:
A) Lewis collected cash in advance of delivering the goods.
B) Lewis collected cash after delivering the goods.
C) Lewis is a very poor businessperson.
D) Lewis suffered a default on an accounts receivable.
Difficulty: 3 Hard
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
156) Heather sells goods to Chrissy in a transaction for which the time value of money is viewed as significant. The goods have a fair value of $3,000, and Heather receives a total of $4,000 cash in full payment, consistent with the sales contract. From this information we can infer that:
A) Cash of $4,000 was debited upon delivery of the goods.
B) Sales revenue of $3,000 was credited when payment was received.
C) A discount of $1,000 on notes receivable was credited upon delivery of the goods.
D) Heather must have received cash in advance of delivering the goods.
Notes receivable | 4,000 |
|
Discount on notes receivable |
| 1,000 |
Sales revenue |
| 3,000 |
Difficulty: 3 Hard
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
157) Johnson sells $100,000 of product to Robbins, and also purchases $10,000 of advertising services from Robbins. The advertising services have a fair value of $8,000. Johnson should record revenue on its sale of product to Robbins of:
A) $100,000
B) $98,000
C) $92,000
D) $90,000
Difficulty: 1 Easy
Topic: Transaction price―Pay by seller to customer
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
158) Which of the following is not true?
A) Licensing fees are recognized as revenue over time whenever the seller expects its ongoing activities to affect the benefits that the buyer receives from intellectual property.
B) License fees are recognized as revenue over time for any license that is viewed as providing a right of access.
C) License fees are recognized as revenue at a point in time if the buyer expects that the seller's future activities will not affect the benefit the buyer derives from the intellectual property.
D) Licensing fees are recognized as revenue at the end of the license period, when the seller has completed its performance obligation to provide access to its intellectual property.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
159) Which of the following is not true?
A) Licenses for functional intellectual property typically have revenue recognized at a point in time.
B) Licenses for symbolic intellectual property convey a right of use, and not a right of access.
C) Licenses for functional intellectual property can be viewed as conveying an access right.
D) Software and media are examples of functional intellectual property.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
160) Maas LLP developed software that helps farmers to plow their fields in a manner that prevents erosion and maximizes the effectiveness of irrigation. Sunny Dale paid a licensing fee of $20,000 for a copy of the software. Although Sunny Dale can use the software as long as it wants, Maas expects that Sunny Dale will use the software for approximately 5 years. Maas does not anticipate any further interaction with Sunny Dale following transfer of the license. How much revenue should Maas recognize in the first year of the contract?
A) $0
B) $4,000
C) $5,000
D) $20,000
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
161) The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
How much of the $1 million initial license fee should the UFL recognize as revenue in the first year of the contract?
A) $0
B) $250,000
C) $1,000,000
D) Cannot tell from information given.
Difficulty: 1 Easy
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
162) The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years.
Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin's sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?
A) $0
B) $1,000,000
C) $3,000,000
D) $12,000,000
Difficulty: 3 Hard
Topic: Transaction price―Variable consideration; Timing of rev rec―Licenses
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.; 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
163) The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Flyers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000.
Under U.S. GAAP, how much revenue would Mary recognize in year 1 of the license?
A) $0
B) $1,500
C) $3,000
D) $15,000
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
164) The Fremont (Ireland) Flyers were a semi-professional carriage racing team that competed up until the early 1930's. Mary Smith owns the Fremont Flyers' trademark, and recently licensed it to the Fremont (California) Flyers roller derby team. The license allows the roller derby team to use the trademark for five years for a total of $15,000.
Under IFRS, how much revenue would Mary recognize in year 1 of the license?
A) $0
B) $1,500
C) $3,000
D) $15,000
Difficulty: 2 Medium
Topic: IFRS―Revenue recognition
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.; 06-10 Discuss the primary differences between U.S. GAAP and IFRS with respect to revenue recognition.
Bloom's: Apply
AACSB: Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
165) Which of the following is not true about accounting for revenue from franchise arrangements?
A) Franchise arrangements often include a performance obligation for a license as well as for delivery of goods or services.
B) Franchise arrangements typically include one or more performance obligations for which revenue is recognized at a point in time.
C) Franchise arrangements typically include one or more performance obligations for which revenue is recognized over a period of time.
D) Franchise arrangements typically include one performance obligation because the goods or services included in the arrangement are not separately identifiable.
Difficulty: 2 Medium
Topic: Timing of rev rec―Franchises
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
166) Pita Pal sells fast-food franchises. Pita Pal receives $75,000 from a new franchisee for providing initial training, equipment, and furnishings that together have a stand-alone selling price of $75,000. Pita Pal also receives $36,000 per year for use of the Pita Pal name and for ongoing consulting services (starting on the date the franchise is purchased). Rachel became a Pita Pal franchisee on March 1, 2021, and on May 1, 2021 Rachel had completed training and was open for business. How much revenue in 2021 will Pita Pal recognize for its arrangement with Rachel?
A) $75,000
B) $99,000
C) $105,000
D) $111,000
Difficulty: 2 Medium
Topic: Timing of rev rec―Franchises
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
167) Which of the following is typically true for a bill-and-hold arrangement?
A) Revenue is recognized at the point in time when the arrangement is made.
B) Revenue is recognized at the point in time when goods are manufactured.
C) Revenue is recognized at the point in time when the delivery of goods is made.
D) Revenue is recognized at the point in time at which payment from the customer is received.
Difficulty: 1 Easy
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
168) On June 1st, Joseph & Company received a $500 deposit for 80 cases of wine. On June 10th, the customer identified specific vintages that are included in Joseph's inventory, and asked that Joseph not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set those wines aside for the customer, boxed and ready for shipment to the customer. On June 20th the wine was shipped and delivered to the customer. Joseph likely would recognize revenue on
A) June 20th.
B) June 10th.
C) June 1st.
D) Upon consumption of the wine by the customer.
Difficulty: 3 Hard
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
169) Which of the following is most true regarding consignment arrangements?
A) Revenue is recognized at the point in time when the consignment arrangement is made.
B) Revenue is recognized when goods are transferred to the consignee.
C) Revenue is recognized upon sale by the consignee to an end customer.
D) Revenue is never recognized because GAAP does not allow such arrangements.
Difficulty: 1 Easy
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
170) Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
Sweeney most likely should recognize revenue when:
A) He paints the painting, because the painting is produced while he works.
B) He transfers the painting to a barbershop.
C) The barbershop sells the painting.
D) The barbershop's right of return expires.
Difficulty: 1 Easy
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
171) Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.
After Sweeney has transferred a painting to a barbershop, the painting:
A) Should be counted in Sweeney's inventory until the barbershop sells it.
B) Should be counted in the barbershop's inventory, as the barbershop now possesses it.
C) Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display.
D) We lack sufficient information to know who should carry the painting in inventory.
Difficulty: 1 Easy
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
172) Bull'sEye sells gift cards redeemable for Bull'sEye products either in-store or online. During 2021, Bull'sEye sold $2,000,000 of gift cards, and $1,800,000 of the gift cards were redeemed for products. As of December 31, 2021, $150,000 of the remaining gift cards had passed the date at which Bull'sEye concludes that the cards will never be redeemed. How much gift card revenue should Bull'sEye recognize in 2021?
A) $2,000,000
B) $1,950,000
C) $1,850,000
D) $1,800,000
Difficulty: 2 Medium
Topic: Timing of rev rec―Gift cards
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
173) Which of the following is not true about contract assets?
A) Contract assets are recorded when payment depends on something other than the passage of time.
B) Contract assets are recognized when the seller has a conditional right to receive payment.
C) Contract assets are recognized when the seller has been paid in advance for at least partially fulfilling its performance obligations.
D) Contract assets are not the same as accounts receivable.
Difficulty: 2 Medium
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
174) Which of the following is not true about contract liabilities?
A) Contract liabilities are only recognized when the seller has a conditional right to receive payment.
B) Contract liabilities might be called deferred revenue.
C) Contract liabilities are recognized when the seller has been paid in advance of satisfying its performance obligations.
D) Contract liabilities may be shown on a separate line of the balance sheet.
Difficulty: 2 Medium
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
175) Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Gupta recognize for a contract asset, a contract liability, and accounts receivable?
A) Contract asset: $0; contract liability: $300,000, accounts receivable, $0.
B) Contract asset: $300,000; contract liability: $0, accounts receivable, $0.
C) Contract asset: $0; contract liability: $300,000, accounts receivable, $100,000.
D) Contract asset: $300,000; contract liability: $0, accounts receivable, $100,000.
Difficulty: 2 Medium
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
176) Which of the following is not something that revenue recognition disclosures typically should help investors to understand?
A) Timing of revenue and cash flows
B) Outstanding performance obligations
C) Significant judgments used to estimate transaction prices
D) Significant fluctuations in long-term debt necessary to increase revenue in the future
Difficulty: 1 Easy
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
177) Which of the following is not true about revenue recognition with respect to long-term construction contracts?
A) Long-term construction contracts often are viewed as having a single performance obligation, because goods or services fail the "separately identifiable" criterion.
B) Long-term construction contracts often satisfy the criteria for recognizing revenue over time.
C) Long-term construction contracts require accounting for construction in progress as well as billings to customers.
D) Long-term construction contracts typically include multiple performance obligations because of all the different types of goods or services included for each project.
Difficulty: 2 Medium
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
178) Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?
A) The customer consumes the benefit of the seller's work as it is performed.
B) The customer controls the asset as it is created.
C) The seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date.
D) The seller is constructing an addition to property that is owned by the customer.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues; Long-term contracts―Percentage complete
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
179) Which of the following is true about accounting for contract assets (CIP in excess of billings) in each balance sheet prior to completion of long-term construction contracts?
A) Contract assets are likely to be larger if revenue is recognized over time than if revenue is recognized at a point in time.
B) Contract assets are likely to be smaller if revenue is recognized over time than if revenue is recognized at a point in time.
C) Contract assets are likely to be the same size regardless of whether revenue is recognized over time or at a point in time.
D) There is no way to tell how revenue recognition timing will affect the size of contract assets without more information.
Difficulty: 3 Hard
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
180) Which of the following is not true about accounting for long-term construction contracts?
A) Long-term construction contracts could show a contract asset or contract liability, depending on the relation between construction in progress and billings.
B) Billings on contracts in progress is a contra account to accounts receivable.
C) Gross profit is debited to construction in progress.
D) When a customer is billed for payment due, billings on contracts in progress is credited at the same time accounts receivable is debited.
Difficulty: 2 Medium
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
181) A rationale for recognizing revenue over the life of a contract rather than at a single point in time is that:
A) Results are more conservative.
B) It provides a better measure of periodic accomplishment.
C) It is a better match with legal ownership.
D) It results in a lower income tax.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues; Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
182) Revenue on a long-term contract should not be recognized according to the proportion of the performance obligation that has been completed if:
A) Completion rates are certain.
B) Profits are low.
C) Projects are more than five years to completion.
D) The arrangement does not qualify for revenue recognition over time.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues; Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
183) With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:
A) Estimated losses on the overall contract are recognized before the contract is completed.
B) Expenses are recognized each period, but revenue is only recognized when the contract is completed.
C) Use of this approach is not permitted under generally accepted accounting principles.
D) Neither gains nor losses are recognized until the contract is completed.
Difficulty: 1 Easy
Topic: Long-term contracts―Accounting issues; Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
184) When accounting for revenue over time for a long-term contract, the percentage of completion used to recognize revenue in the first year usually is determined by measuring:
A) Costs incurred in the first year, divided by estimated remaining costs to complete the project.
B) Costs incurred in the first year, divided by estimated total costs for the completed project.
C) Costs incurred in the first year, divided by estimated gross profit.
D) Costs incurred in the first year, divided by estimated total costs to be incurred in the remaining years of the project.
Difficulty: 1 Easy
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
185) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue over time with respect to these contracts.
What would be the journal entry made in 2020 to record revenue?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term contracts |
| 1,500,000 |
B)
Accounts receivable | 2,300,000 |
|
Gross profit |
| 800,000 |
Revenue from long-term contracts |
| 1,500,000 |
C)
Construction in progress | 800,000 |
|
Cost of construction | 1,200,000 |
|
Revenue from long-term contracts |
| 2,000,000 |
D)
Accounts receivable | 1,500,000 |
|
Billings in excess of cost | 300,000 |
|
Revenue for long-term contracts |
| 1,800,000 |
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
186) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue over time with respect to these contracts.
In its December 31, 2020, balance sheet, ADH would report:
A) The contract asset, cost and profits in excess of billings, of $500,000.
B) The contract liability, billings in excess of cost, of $300,000.
C) The contract asset, contract amount in excess of billings, of $1,500,000.
D) The contract asset, deferred profit, of $400,000.
Cost + profits: $1,200,000 + $800,000 = | $ | 2,000,000 |
|
Billings: |
| 1,500,000 |
|
Excess: |
| 500,000 |
|
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
187) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue over time with respect to these contracts.
For 2021, what is the journal entry to record revenue?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term contracts |
| 1,500,000 |
B)
Construction in progress | 400,000 |
|
Cost of construction | 600,000 |
|
Revenue from long-term contracts |
| 1,000,000 |
C)
Cost of construction | 2,000,000 |
|
Gross profit | 1,000,000 |
|
Revenue from long-term contracts |
| 3,000,000 |
D)
Accounts receivable | 1,500,000 |
|
Cost of construction |
| 600,000 |
Gross profit |
| 600,000 |
Deferred revenue |
| 300,000 |
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
188) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue upon completion of the contract.
For 2020, what is the journal entry to record revenue?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term contracts |
| 1,500,000 |
B)
Accounts receivable | 2,300,000 |
|
Gross profit |
| 800,000 |
Revenue from long-term contracts |
| 1,500,000 |
C)
Construction in progress | 800,000 |
|
Cost of construction | 1,200,000 |
|
Revenue from long-term contracts |
| 2,000,000 |
D) No entry.
Difficulty: 2 Medium
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
189) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue upon completion of the contract.
In its December 31, 2020, balance sheet, ADH would report:
A) The contract asset, cost and profits in excess of billings, of $500,000.
B) The contract liability, billings in excess of cost, of $300,000.
C) The contract asset, contract amount in excess of billings, of $1,500,000.
D) The contract asset, deferred profit, of $400,000.
Cost + profits: $1,200,000 + $0 = | $ | 1,200,000 |
|
|
Billings: |
| 1,500,000 |
|
|
Excess: | $ | (300,000 | ) |
|
Difficulty: 2 Medium
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
190) Arizona Desert Homes (ADH) constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
ADH recognizes revenue upon completion of the contract.
What is the journal entry in 2021 to record revenue?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term contracts |
| 1,500,000 |
B)
Construction in progress | 400,000 |
|
Cost of construction | 600,000 |
|
Revenue from long-term contracts |
| 1,000,000 |
C)
Cost of construction | 2,000,000 |
|
Gross profit | 1,000,000 |
|
Revenue from long-term contracts |
| 3,000,000 |
D)
Construction in progress | 1,200,000 |
|
Cost of construction | 1,800,000 |
|
Revenue from long-term contracts |
| 3,000,000 |
Difficulty: 2 Medium
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
191) JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
| Cost incurred | Estimated Cost to Complete | ||||
2020 | $ | 250,000 |
| $ | 1,550,000 |
|
2021 |
| 1,600,000 |
|
| 500,000 |
|
2022 |
| 450,000 |
|
| 0 |
|
In 2020, JRE2 would report (rounded to the nearest thousand) gross profit (loss) of:
A) $0.
B) $(100,000).
C) $56,000.
D) $73,000.
Difficulty: 2 Medium
Topic: Long-term contracts―Loss on contract; Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
192) JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
| Cost incurred | Estimated Cost to Complete | ||||
2020 | $ | 250,000 |
| $ | 1,550,000 |
|
2021 |
| 1,600,000 |
|
| 500,000 |
|
2022 |
| 450,000 |
|
| 0 |
|
In 2021, JRE2 would report gross profit (loss) of:
A) $(223,000).
B) $(150,000).
C) $(206,000).
D) $0.
Difficulty: 3 Hard
Topic: Long-term contracts―Loss on contract; Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
193) JRE2 Inc. entered into a contract to install a pipeline for a fixed price of $2,200,000. JRE2 recognizes revenue upon contract completion.
| Cost incurred | Estimated Cost to Complete | ||||
2020 | $ | 250,000 |
| $ | 1,550,000 |
|
2021 |
| 1,600,000 |
|
| 500,000 |
|
2022 |
| 450,000 |
|
| 0 |
|
In 2022, JRE2 would report gross profit (loss) of:
A) $(100,000).
B) $50,000.
C) $123,000.
D) $2,000.
Difficulty: 3 Hard
Topic: Long-term contracts―Loss on contract; Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
194) Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Indiana:
A) Recognized no gross profit or loss on the project in 2021.
B) Recognized $6 million loss on the project in 2021.
C) Recognized $9 million gross profit on the project in 2021.
D) Recognized $36 million loss on the project in 2021.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
195) Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
In 2022, Indiana incurred additional costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Indiana:
A) Recognized $15 million gross profit on the project in 2022.
B) Recognized $13.5 million gross profit on the project in 2022.
C) Recognized $6 million gross profit on the project in 2022.
D) Recognized $1.5 million gross profit on the project in 2022.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
196) Indiana Co. began a construction project in 2021 with a contract price of $150 million to be received when the project is completed in 2023. During 2021, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed.
Suppose that, in 2022, Indiana incurred additional costs of $63.75 million and estimated an additional $42.75 million in costs to complete the project. Indiana:
A) Recognized $3.75 million loss on the project in 2022.
B) Recognized $5.25 million gross profit on the project in 2022.
C) Recognized $7.5 million gross profit on the project in 2022.
D) Recognized $1.5 million loss on the project in 2022.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete; Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
197) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
Accounts receivable, 12/31/2021 (from construction progress billings) | $ | 37.5 |
|
Actual construction costs incurred in 2021 | $ | 135 |
|
Cash collected on project during 2021 | $ | 105 |
|
Construction in progress, 12/31/2021 | $ | 207 |
|
Estimated percentage of completion during 2021 |
| 60 | % |
What is the amount of gross profit on the project recognized by CCC during 2021?
A) $160 million.
B) $72 million.
C) $48 million.
D) Cannot be determined from the given information.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
198) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
Accounts receivable, 12/31/2021 (from construction progress billings) | $ | 37.5 |
|
Actual construction costs incurred in 2021 | $ | 135 |
|
Cash collected on project during 2021 | $ | 105 |
|
Construction in progress, 12/31/2021 | $ | 207 |
|
Estimated percentage of completion during 2021 |
| 60 | % |
What are CCC's estimated remaining construction costs on the project at the end of 2021?
A) $90 million.
B) $135 million.
C) $225 million.
D) $0.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
199) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
Accounts receivable, 12/31/2021 (from construction progress billings) | $ | 37.5 |
|
Actual construction costs incurred in 2021 | $ | 135 |
|
Cash collected on project during 2021 | $ | 105 |
|
Construction in progress, 12/31/2021 | $ | 207 |
|
Estimated percentage of completion during 2021 |
| 60 | % |
What is the fixed contract price for CCC's project?
A) $120 million.
B) $225 million.
C) $345 million.
D) $349.5 million.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
200) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
Accounts receivable, 12/31/2021 (from construction progress billings) | $ | 37.5 |
|
Actual construction costs incurred in 2021 | $ | 135 |
|
Cash collected on project during 2021 | $ | 105 |
|
Construction in progress, 12/31/2021 | $ | 207 |
|
Estimated percentage of completion during 2021 |
| 60 | % |
What were the construction billings by CCC during 2021?
A) $142.5 million.
B) $67.5 million.
C) $37.5 million.
D) Cannot be determined from the given information.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
201) In 2021, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions):
Accounts receivable, 12/31/2021 (from construction progress billings) | $ | 37.5 |
|
Actual construction costs incurred in 2021 | $ | 135 |
|
Cash collected on project during 2021 | $ | 105 |
|
Construction in progress, 12/31/2021 | $ | 207 |
|
Estimated percentage of completion during 2021 |
| 60 | % |
How much cash remains to be collected by CCC on the project?
A) $70 million.
B) $202.5 million.
C) $240 million.
D) Cannot be determined from the given information.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
202) Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2021, are presented below:
Bid price |
| $ | 450,000 |
|
Contract cost: | 2020 |
| (180,000 | ) |
| 2021 |
| (195,000 | ) |
Gross profit: |
|
| 75,000 |
|
Estimated cost to complete:
12/31/2020 | $ | 200,000 |
|
12/31/2021 |
| 0 |
|
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2020 would be (rounded to the nearest thousand):
A) $33,000.
B) $36,000.
C) $69,000.
D) $30,000.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
203) Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2021, are presented below:
Bid price |
| $ | 450,000 |
|
Contract cost: | 2020 |
| (180,000 | ) |
| 2021 |
| (195,000 | ) |
Gross profit: |
|
| 75,000 |
|
Estimated cost to complete:
12/31/2020 | $ | 200,000 |
|
12/31/2021 |
| 0 |
|
Assuming BCC recognizes revenue over time according to percentage of completion for this contract, the gross profit recognized in 2021 would be (rounded to the nearest thousand):
A) $6,000.
B) $39,000.
C) $42,000.
D) $45,000.
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
204) Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2021, are presented below:
Bid price |
| $ | 450,000 |
|
Contract cost: | 2020 |
| (180,000 | ) |
| 2021 |
| (195,000 | ) |
Gross profit: |
|
| 75,000 |
|
Estimated cost to complete:
12/31/2020 | $ | 200,000 |
|
12/31/2021 |
| 0 |
|
Assuming BCC recognizes revenue upon project completion, what would gross profit have been in 2020 and 2021 (rounded to the nearest thousand)?
| 2020 | 2021 | ||||
a. | $ | 36,000 |
| $ | 39,000 |
|
b. | $ | 30,000 |
| $ | 45,000 |
|
c. | $ | 70,000 |
| $ | 5,000 |
|
d. | $ | 0 |
| $ | 75,000 |
|
A) option a
B) option b
C) option c
D) option d
Difficulty: 1 Easy
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
205) Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:
A) Revenue is realized.
B) Any receivable is collected.
C) Collection is reasonably certain.
D) Collection is absolutely assured.
Difficulty: 1 Easy
Topic: Chapter Supp―Realization principle
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
206) Under IFRS, which of the following is not a condition for recognizing revenue?
A) The amount of revenue and costs associated with the transaction can be measured reliably.
B) It is reasonably possible that the economic benefits associated with the transaction will flow to the seller.
C) For sales of goods, the seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.
D) For sales of services, the stage of completion can be measured reliably.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
207) Under IFRS, revenue for a product sale should occur when:
A) Inventory production is complete.
B) Warranty fulfillment is viewed as unlikely.
C) The seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.
D) The buyer has paid a preponderance of installment amounts due.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
208) Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:
A) Installment sales method.
B) Point of sales method.
C) Cost recovery method.
D) Installment sales method or cost recovery method.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
209) Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:
A) Point of sale.
B) Installment sales.
C) Cost recovery.
D) Installment sales or cost recovery.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
210) On December 15, 2021, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Rigsby has a December 31 year-end.
In 2021, Rigsby would recognize realized gross profit of:
A) $500,000.
B) $0.
C) $900,000.
D) $100,000.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
211) On December 15, 2021, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Rigsby has a December 31 year-end.
In 2022, Rigsby would recognize realized gross profit of:
A) $0.
B) $450,000.
C) $300,000.
D) $400,000.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
212) On December 15, 2021, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Rigsby has a December 31 year-end.
In its December 31, 2021, balance sheet, Rigsby would report:
A) Realized gross profit of $100,000.
B) Deferred gross profit of $100,000.
C) Installment receivables (net) of $3,200,000.
D) Installment receivables (net) of $4,000,000.
Sale: | Installment receivables | 4,500,000 |
|
| Inventory |
| 3,600,000 |
| Deferred gross profit |
| 900,000 |
|
|
|
|
Payment: | Cash | 500,000 |
|
| Installment receivables |
| 500,000 |
|
|
|
|
| Deferred gross profit | 100,000 |
|
| Realized gross profit |
| 100,000 |
Installment receivables $4,500,000 − $500,000 | $ | 4,000,000 |
|
Deferred gross profit: $900,000 − $100,000 |
| 800,000 |
|
Installment receivables (net) | $ | 3,200,000 |
|
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
213) On December 15, 2021, Rigsby Sales Co. sold a tract of land that cost $3,600,000 for $4,500,000. Rigsby appropriately uses the installment sales method of accounting for this transaction. Terms called for a down payment of $500,000 with the balance in two equal annual installments payable on December 15, 2022, and December 15, 2023. Ignore interest charges. Rigsby has a December 31 year-end.
At December 31, 2022, Rigsby would report in its balance sheet:
A) Realized gross profit of $500,000.
B) Deferred gross profit of $400,000.
C) Realized gross profit of $400,000.
D) Cost of installment sales $1,600,000.
12/15/2022 | Cash | 2,000,000 |
|
| Installment receivables |
| 2,000,000 |
| Deferred gross profit | 400,000 |
|
| Realized gross profit |
| 400,000 |
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
214) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.
In 2020, Reliable would recognize gross profit of:
A) $0.
B) $25,000.
C) $8,090.
D) $8,333.
Difficulty: 2 Medium
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
215) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.
In 2021, Reliable would recognize gross profit of:
A) $0.
B) $6,000.
C) $5,000.
D) $10,000.
Cost | $ | 30,000 |
|
| 2021 payment | $ | 15,000 |
|
|
2020 cost recovery |
| (20,000 | ) |
| Cost recovery |
| (10,000 | ) |
|
Remaining cost | $ | 10,000 |
|
| Gross profit | $ | 5,000 |
|
|
Difficulty: 2 Medium
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
216) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.
In 2022, Reliable would recognize gross profit of:
A) $0.
B) $6,000.
C) $8,000.
D) $20,000.
Cost | $ | 30,000 |
|
|
2020 cost recovery |
| (20,000 | ) |
|
2021 cost recovery |
| (10,000 | ) |
|
Remaining cost |
| 0 |
|
|
Difficulty: 2 Medium
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
217) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.
In its 2020 year-end balance sheet, Reliable would report installment receivables (net) of:
A) $20,000.
B) $35,000.
C) $25,909.
D) $10,000.
Sale: | Installment receivables | 55,000 |
|
| Inventory |
| 30,000 |
| Deferred gross profit |
| 25,000 |
Payment: | Cash | 20,000 |
|
| Installment receivables |
| 20,000 |
Installment receivables $55,000 – $20,000 | $ | 35,000 |
|
|
Deferred gross profit |
| (25,000 | ) |
|
Installment receivables (net) | $ | 10,000 |
|
|
Difficulty: 3 Hard
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
218) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured, and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise is in condition to be re-sold. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2020. Collections on this sale were $20,000 in 2020, $15,000 in 2021, and $20,000 in 2022.
In its 2021 year-end balance sheet, Reliable would report installment receivables (net) of:
A) $0.
B) $20,000.
C) $4,000.
D) $15,000.
Sale: | Installment receivables | 55,000 |
|
| Inventory |
| 30,000 |
| Deferred gross profit |
| 25,000 |
2020: | Cash | 20,000 |
|
| Installment receivables |
| 20,000 |
2021: | Cash | 15,000 |
|
| Installment receivables |
| 15,000 |
| Deferred gross profit | 5,000 |
|
| Realized gross profit |
| 5,000 |
Installment receivables | $ | 20,000 |
|
|
Deferred gross profit |
| (20,000 | ) |
|
Installment receivables (net) | $ | 0 |
|
|
Difficulty: 3 Hard
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
219) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
Total cash collections on installment sales during 2021 would be:
A) $700,000.
B) $300,000.
C) $800,000.
D) $0.
Difficulty: 1 Easy
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
220) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2020, Lake would recognize realized gross profit of:
A) $150,000.
B) $0.
C) $300,000.
D) $450,000.
Difficulty: 2 Medium
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
221) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2022, Lake would recognize realized gross profit of:
A) $0.
B) $450,000.
C) $310,000.
D) $700,000.
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
222) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2021, balance sheet, Lake would report:
A) Deferred gross profit of $700,000.
B) Deferred gross profit of $1,050,000.
C) Installment receivables (net) of $750,000.
D) Installment receivables (net) of $900,000.
2020 |
|
|
|
Sales: Installment receivables |
|
|
|
= $900,000 – $300,000 (2020 collections) – $300,000 (2021 collections) = | $ | 300,000 |
|
Deferred gross profit |
|
|
|
= $450,000 – $150,000 (2020 collections) – $150,000 (2021 collections) = | $ | 150,000 |
|
Net installment receivable for 2020 sales = | $ | 150,000 |
|
|
|
|
|
2021 |
|
|
|
Sales: Installment receivables |
|
|
|
= $1,500,000 – $500,000 (2021 collections) = | $ | 1,000,000 |
|
Deferred gross profit |
|
|
|
= $600,000 – $200,000 (2021 collections) = | $ | 400,000 |
|
Net installment receivable for 2021 = | $ | 600,000 |
|
Total = | $ | 750,000 |
|
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
223) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the installment sales method for revenue recognition. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2023, Lake would record a loss on repossession of:
A) $45,000.
B) $200,000.
C) $120,000.
D) $80,000.
Repossessed inventory | 75,000 |
|
Deferred gross profit | 80,000 |
|
Loss on repossession (plug) | 45,000 |
|
Installment receivable |
| 200,000 |
Difficulty: 3 Hard
Topic: Chapter Supp―Installment sales method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
224) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2020, Lake would recognize realized gross profit of:
A) $150,000.
B) $0.
C) $300,000.
D) $450,000.
Difficulty: 2 Medium
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
225) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2022, Lake would recognize realized gross profit of:
A) $0.
B) $300,000.
C) $310,000.
D) $700,000.
Difficulty: 3 Hard
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
226) Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2020, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2020, $300,000 in 2021, and $300,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2021, $400,000 in 2022, and $400,000 in 2023 associated with those sales. In 2023, Lake also repossessed $200,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2021, balance sheet, Lake would report:
A) Deferred gross profit of $700,000.
B) Deferred gross profit of $600,000.
C) Installment receivables (net) of $700,000.
D) Installment receivables (net) of $400,000.
2020 Sales: |
|
|
|
Installment receivables |
|
|
|
= $900,000 − $300,000 (2020 collections) − $300,000 (2021 collections) = | $ | 300,000 |
|
Deferred gross profit |
|
|
|
= $450,000 − $0 (all 2020 collections to cost recovery) – $150,000 ($150,000 of 2021 collections to cost recovery) = | $ | 300,000 |
|
Net installment receivable for 2020 sales = | $ | 0 |
|
|
|
|
|
2021 Sales: |
|
|
|
Installment receivables |
|
|
|
= $1,500,000 − $500,000 (2021 collections) = | $ | 1,000,000 |
|
Deferred gross profit |
|
|
|
= $600,000 − $0 (all 2021 collections to cost recovery) = | $ | 600,000 |
|
Net installment receivable for 2021 sales = | $ | 400,000 |
|
Total = | $ | 400,000 |
|
Difficulty: 3 Hard
Topic: Chapter Supp―Cost recovery method
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
227) When using the cost recovery method of accounting for long-term construction contracts under IFRS:
A) Estimated losses on the overall contract are recognized before the contract is completed.
B) Expenses are recorded each period, but revenue is only recognized when the contract is completed.
C) Companies can use the percentage-of-completion method if that is their preference.
D) Neither gains nor losses are recognized until the contract is completed.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
228) When using the cost recovery method of accounting for long-term construction contracts under IFRS, early in the life of the contract it is typically the case that:
A) Expenses in excess of revenues are recognized.
B) Revenues in excess of expenses are recognized.
C) An equal amount of revenue and expense is recognized.
D) There is no predictable pattern of revenue and expense.
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
229) The cost recovery method of accounting for long-term construction contracts under IFRS is sometimes referred to as the:
A) "Sales-neutral approach."
B) "Completed contract method."
C) "Multi-step approach."
D) "Zero profit method."
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
230) The percentage-of-completion method violates the general rule for revenue recognition that:
A) Collection is reasonably assured.
B) Costs are known or reasonably estimated.
C) The earnings process is complete.
D) Collections have been received.
Difficulty: 2 Medium
Topic: Chapter Supp―Realization principle
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
231) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
SDH uses the cost recovery method under IFRS to recognize revenue.
What is the journal entry in 2020 to record revenue?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term construction contracts |
| 1,500,000 |
B)
Accounts receivable | 2,300,000 |
|
Gross profit |
| 800,000 |
Revenue from long-term construction contracts |
| 1,500,000 |
C)
Construction in progress | 800,000 |
|
Cost of construction | 1,200,000 |
|
Revenue from long-term construction contracts |
| 2,000,000 |
D)
Cost of construction | 1,200,000 |
|
Revenue from long-term construction contracts |
| 1,200,000 |
Difficulty: 2 Medium
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
232) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
SDH uses the cost recovery method under IFRS to recognize revenue.
In its December 31, 2020, balance sheet, SDH would report:
A) The asset, cost and profits in excess of billings, of $500,000.
B) The liability, billings in excess of cost, of $300,000.
C) The asset, contract amount in excess of billings, of $1,500,000.
D) The asset, deferred profit, of $400,000.
Cost + profits: $1,200,000 + $0 = | $ | 1,200,000 |
|
|
Billings: |
| 1,500,000 |
|
|
Excess: | $ | (300,000 | ) |
|
Difficulty: 2 Medium
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking; Diversity
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
233) Sahara Desert Homes (SDH) reports under IFRS and constructed a new subdivision during 2020 and 2021 under contract with Cactus Development Co. Relevant data are summarized below:
Contract amount |
| $ | 3,000,000 |
|
Cost: | 2020 |
| 1,200,000 |
|
| 2021 |
| 600,000 |
|
Gross profit: | 2020 |
| 800,000 |
|
| 2021 |
| 400,000 |
|
Contract billings: | 2020 |
| 1,500,000 |
|
| 2021 |
| 1,500,000 |
|
SDH uses the cost recovery method under IFRS to recognize revenue.
What is SDH's journal entry to record revenue in 2021?
A)
Accounts receivable | 1,500,000 |
|
Revenue from long-term construction contracts |
| 1,500,000 |
B)
Construction in progress | 400,000 |
|
Cost of construction | 600,000 |
|
Revenue from long-term construction contracts |
| 1,000,000 |
C)
Cost of construction | 2,000,000 |
|
Gross profit | 1,000,000 |
|
Revenue from long-term construction contracts |
| 3,000,000 |
D)
Construction in progress | 1,200,000 |
|
Cost of construction | 600,000 |
|
Revenue from long-term construction contracts |
| 1,800,000 |
Difficulty: 3 Hard
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
234) Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2021, are presented below:
Bid price |
| $ | 450,000 |
|
Contract cost: | 2020 |
| (180,000 | ) |
| 2021 |
| (195,000 | ) |
Gross profit: |
|
| 75,000 |
|
Estimated cost to complete:
12/31/2020 | $ | 200,000 |
|
12/31/2021 |
| 0 |
|
Assuming BCC used the cost recovery method to recognize revenue under IFRS, what would gross profit have been in 2020 and 2021 (rounded to the nearest thousand)?
| 2020 | 2021 | ||||
a. | $ | 36,000 |
| $ | 39,000 |
|
b. | $ | 30,000 |
| $ | 45,000 |
|
c. | $ | 70,000 |
| $ | 5,000 |
|
d. | $ | 0 |
| $ | 75,000 |
|
A) Option a
B) Option b
C) Option c
D) Option d
Difficulty: 1 Easy
Topic: Chapter Supp―IFRS Revenue recognition
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; BB Industry; FN Measurement / Keyboard Navigation
235) Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2020, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:
A) Deferred revenue for $36,000.
B) Deferred revenue for $30,000.
C) Franchise fee revenue for $36,000.
D) Franchise fee revenue for $6,000.
Cash | 6,000 |
|
Notes receivable | 30,000 |
|
Deferred revenue |
| 36,000 |
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
236) Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2020, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume that at the time of signing the contract, collection of the receivable was assured and that service obligations were substantial. However, by October 20, 2020, substantially all continuing obligations had been met. The journal entry required at October 20, 2020 would include a:
A) Credit to franchise fee receivable for $27,000.
B) Debit to deferred revenue for $36,000.
C) Credit to franchise fee revenue for $9,000.
D) Debit to deferred revenue for $27,000.
Deferred revenue | 36,000 |
|
Franchise fee revenue |
| 36,000 |
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
237) Flapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $36,000 plus operating fees of $500 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2020, Tim Cruise signed a franchise contract, paying the standard $6,000 down with the balance due over five years with interest.
Assume at March 15, 2020, the time of signing the contract, collection of the receivable was reasonably assured and there were no significant continuing obligations. The journal entry at signing would include a:
A) Credit to franchise fee revenue for $36,000.
B) Credit to franchise fee revenue for $9,000.
C) Credit to deferred revenue for $36,000.
D) Credit to deferred revenue for $27,000.
Cash | 6,000 |
|
Notes receivable | 30,000 |
|
Franchise fee revenue |
| 36,000 |
Difficulty: 1 Easy
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
238) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi paid the $50,000 in cash when she signed the agreement. RS can recognize revenue associated with the $50,000:
A) When Steffi signs the agreement and pays the cash.
B) As soon as RS has assisted Steffi in setting up the store.
C) Gradually as RS provides advertising and administration services.
D) Only after the store has operated long enough for the chance of business failure to be remote.
Difficulty: 1 Easy
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
239) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS can recognize revenue associated with the $50,000:
A) When Steffi signs the agreement, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
B) As soon as RS has assisted Steffi in setting up the store, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
C) Gradually as RS provides advertising and administration services.
D) When RS receives installment payments from Steffi, so long as RS has sufficient experience with similar arrangements to estimate uncollectible accounts.
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
240) The Racquet Store (RS) sells franchise agreements in which it charges an up-front fee of $50,000 for assistance in setting up a store, and then a monthly fee of $1,000 for national advertising and administrative assistance. Steffi Hingis signs a franchise agreement with RS.
Assume that Steffi signed a $50,000 installment note when she signed the franchise agreement. RS has no experience estimating uncollectible accounts associated with these sorts of notes. RS can recognize:
A) $50,000 of revenue when Steffi signs the agreement.
B) $50,000 of revenue as soon as it has assisted Steffi in setting up the store.
C) Revenue under the installment sales method, starting when Steffi signs the agreement.
D) Revenue under the installment sales method, as soon as it has assisted Steffi in setting up the store.
Difficulty: 2 Medium
Topic: Chapter Supp―Franchise sales
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
241) Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
Sullivan should recognize revenue for the two parts of the arrangement as follows:
A) Recognize the entire $500 when the customer pays cash to buy the package.
B) Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package; defer the portion attributable to technical support and recognize over the support period.
C) Defer the entire $500 and recognize over the support period.
D) Recognize the entire $500 upon conclusion of the support period.
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
242) Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
The amount of revenue that GAAP, regarding software revenue recognition, would require Sullivan to attribute to the software program (as opposed to the technical support) is (rounded):
A) $450.
B) $475.
C) $432.
D) $400.
Difficulty: 3 Hard
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
243) GAAP that covers revenue recognition for multiple-element arrangements requires that a seller recognize revenue for a particular part if:
A) The part has value on a stand-alone basis.
B) Customer acceptance of the part is not contingent on successful delivery of a later part.
C) The part constitutes at least a "preponderance of the fair value" of the total arrangement.
D) Both the part has value on stand-alone basis and customer acceptance of the part is not contingent on successful delivery of a later part are required.
Difficulty: 2 Medium
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
244) Under GAAP, with respect to multiple-element arrangements, if the revenue for a particular part of a multiple-element arrangement does not qualify for separate recognition, it is:
A) Never recognized.
B) Recognized when the contract is signed or persuasive evidence of an arrangement exists.
C) Recognized when revenue for the other parts is recognized.
D) Recognized at the end of the contract.
Difficulty: 2 Medium
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
245) "VSOE" stands for:
A) "Vendor-specific objective evidence."
B) "Vendor substantiation of earnings."
C) "Value-specified operating earnings."
D) "Variable set overhead earned."
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
246) "VSOE" is necessary to separately recognize revenue in multiple-element contracts for:
A) All service contracts.
B) All product contracts.
C) All contracts that involve at least one non-software element.
D) Software contracts.
Difficulty: 1 Easy
Topic: Chapter Supp―Software―Multiple-element
Learning Objective: Supplement 6 Revenue Recognition in GAAP in Effect Prior to ASU No. 2014-09.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Industry; FN Measurement / Keyboard Navigation
247) Squeaky Shine provides car washing services in Jersey City, New Jersey. A three-month pass for automatic car wash sells for $60, which entitles the customer for an unlimited number of car washes during the contract period. Squeaky Shine estimates that pass holders wash their cars equally throughout the three-month period. On December 1st, customers purchased $1,260 of the three-month passes, with usage of the passes occurring evenly throughout the contract period.
Required:
1) Prepare the journal entries that Squeaky Shine would record on December 1 and on December 31, 2021, with respect to this transaction.
2) State the account titles and amounts that will be included in Squeaky Shine's 2021 income statement and balance sheet.
Difficulty: 2 Medium
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
248) Assume that a customer enrolls in AAA's Premier Membership, which provides 12 months of roadside assistance for $120. On August 1, 2021, a customer purchases a contract that runs from that date through July 31, 2022. Given that roadside assistance requests occur equally throughout the contract period, AAA uses "proportion of time" as its measure of progress toward completion.
Required:
1) Prepare the journal entries that AAA would record on August 1 and on December 31, 2021, with respect to this transaction.
2) State the amounts included in relevant accounts in AAA's 2021 income statement and balance sheet.
Difficulty: 2 Medium
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
249) Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for $3 million, which was received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 2021 to July 31, 2022.
Required:
Prepare any journal entry that Deluxe would record:
(1) at inception of the contract and
(2) at the end of 2021 to recognize all revenue associated with this contract that should be recognized in 2021.
Difficulty: 1 Easy
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
250) Poseidon Corporation, based in Greece, specializes in painting cargo ships. On December 1, 2021 Poseidon received $300,000 in advance from Worldwide Shipping, Inc. to paint a 40,000-ton cargo vessel. The painting process is scheduled to begin on December 1, 2021, and the ship is to be returned to Worldwide in four months. Worldwide retains legal title to the ship during the contract period, and can sell the ship to another shipper during the contract period if it so chooses.
Required:
Assuming Poseidon uses "proportion of time" as its measure of progress toward completion, prepare any journal entry that Poseidon would record:
(1) at inception of the contract
(2) at the end of 2021 to recognize all revenue associated with this contract that should be recognized in 2021. Ignore any costs associated with providing the painting service.
Difficulty: 1 Easy
Topic: Revenue over time―Progress to completion
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
251) Accorsi & Sons specializes in selling and installing upscale home theater systems. On March 1, 2021, Accorsi sold a premium home theater package that includes a projector, set of surround speakers, and high quality leather seats, along with complete installation service, for $32,500. If sold separately, each of these goods or services would have cost $15,000 (projector), $12,500 (speakers), $17,500 (seats), and $3,000 (installation), respectively.
Required:
How much of the transaction price would be allocated to the projector, the speakers, the leather seats, and the installation service, assuming that each of these four parts of the contract is a separate performance obligation? Show your work.
Difficulty: 2 Medium
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
252) Baldi Piano manufactures customized pianos for concert halls. On July 1, 2021, Baldi signed a contract to deliver a concert piano for $150,000. Under the contract, Baldi is also obligated to provide a one-year maintenance service. If sold separately, the piano and the maintenance service would have cost $140,000 and $20,000, respectively.
Required:
How much of the transaction price would be allocated to the piano and the maintenance service, assuming they are separate performance obligations? Show your work.
Difficulty: 1 Easy
Topic: Mult perf oblig―Allocate transact price
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the information below to answer the following questions:
The Rink offers annual $200 memberships that entitle members to unlimited use of ice-skating facilities and locker rooms. Each new membership also entitles the member to receive ten "20% off a $5 meal" coupons that are redeemable at the Rink's snack bar. The Rink estimates that approximately 80% of the coupons will be redeemed, and that, if the coupons weren't redeemed, $5 meals still would be discounted by 5% because of ongoing promotions.
253) Calculate how much of the transaction price should be allocated to each performance obligation in the contract. Show your work.
Difficulty: 3 Hard
Topic: Mult perf oblig―Allocate transact price; Contract features―Prepayments; Contract features―Customer options
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
254) Prepare the journal entry to recognize the sale of a new membership. Clearly identify revenue or deferred revenue associated with each performance obligation.
Difficulty: 2 Medium
Topic: Contract features―Customer options
Learning Objective: 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
255) Antonio's Car Services provides maintenance services for motorized vehicles. In March 2021, Rick placed an order for a new set of tires for $350. When a customer purchases goods or services in excess of $300, Antonio's gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio's estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods or services that typically sell for $75.
Required:
(a) How many performance obligations are in Rick's contract? Explain the reasons for your answer.
(b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio's uses the residual method to estimate the stand-alone selling price of new tires sold without the discount coupon.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Customer options; Transaction price―Residual approach
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.; 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
256) DGA Associates, Inc. sells computer workstations designed for architects. In 2021, it sold 120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount coupon for any additional future purchases made in the next 12 months. Based on historical experience, DGA expects that approximately 30% of the coupons will be utilized, and the goods purchased with the coupons would normally sell for $350.
Required:
(a) How many performance obligations are in a contract to purchase a computer workstation? Explain the reasons for your answer.
(b) Prepare a journal entry to record revenue for the sale of 120 computer workstations, assuming that DGA uses the residual method to estimate the stand-alone selling price of the workstations sold without the discount coupon.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Customer options; Transaction price―Residual approach
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.; 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
257) On February 12, 2021, Mohawk Home and Garden enters into contract with a local business to provide weekly grass-cutting services between May and September of that year, and receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50% discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk charged the same amount ($2,000) for the same weekly grass-cutting service, but without the grill discount coupon. Based on historical experience with other clients, Mohawk estimates that about 40% of the coupons will be redeemed, purchasing grills with an average total list price of $400.
Required:
(a) How many performance obligations are in this contract? Explain the reasons for your answer.
(b) Prepare the journal entry to account for the transaction as of February 12, 2021, clearly identifying the revenue or deferred revenue associated with each performance obligation.
Difficulty: 3 Hard
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Prepayments; Contract features―Customer options
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
258) Mammoth Publishing, Inc. owns a weekly magazine called "Nova Health," and sells annual subscriptions for $96. Customers prepay their subscription fee and receive 52 issues starting in the following month. The company also offers new subscribers a 25% discount coupon on its other weekly magazine called "Fishing & Camping," which has a list price of $84 for an annual subscription. Mammoth estimates that approximately 10% of the discount coupons will be redeemed.
Required:
(a) How many performance obligations are in a single subscription contract? Explain the reasons for your answer.
(b) Prepare the journal entry to account for one new subscription of "Nova Health," clearly identifying the revenue or deferred revenue associated with each performance obligation.
Difficulty: 3 Hard
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Prepayments; Contract features―Customer options
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target.
259) Assume that Wiggins estimates uncertain consideration as the most likely amount.
Required:
Do the following for Wiggins:
a. Prepare the journal entry on July 31 to record the first month of revenue under the contract.
b. Assuming total cost savings exceed the target, prepare the journal entry, if any, on October 31 to record receipt of the $20,000 bonus (ignore the normal October payment of $25,000).
c. Assuming total cost savings do not reach the target, prepare the journal entry, if any, on October 31 to record failure to receive the $20,000 bonus (ignore the normal October payment of $25,000).
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
260) Assume that Wiggins estimates variable consideration as the expected value.
Required:
Prepare the journal entry on July 31 to record the first month of revenue under the contract.
Difficulty: 2 Medium
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
261) Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard drives for various clients in the U.S. In June 2021, it enters into a contract with the U.S. government to properly discard computer hard drives. The contract specifies a fixed fee of $50,000 for the first 25,000 hard drives, and an additional $5,000 for each incremental 10,000 drives. The company estimates a 65% chance of handling 25,000 drives or fewer, 30% chance of handling more than 25,000 drives but fewer than 35,000 drives, and 5% chance of handling more than 35,000 drives but fewer than 45,000 drives.
Required:
Assuming that the company determines transaction price as the expected value of the consideration, what is Dr. Privacy's estimate of the transaction price for this contract?
Difficulty: 2 Medium
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
262) In February 2021, Omnibus Interior Corporation enters into a contract with Pike Realty to remodel a 6-unit luxury condominium in New York City. Under the contract, the company is entitled to receive a fixed fee of $1 million, and an additional performance bonus of $500,000 if the property is sold during the same year.
Required:
Given a strong demand for housing, Omnibus estimates that the property would most likely be sold within the same year, and bases estimates of variable consideration on the most likely estimate. On what transaction price should Omnibus base revenue recognition?
Difficulty: 1 Easy
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti's contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and an additional $1,000 if 30% of Di Antonio's new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.
263) Assuming Brunetti uses the most likely value to estimate the variable consideration, calculate the transaction price.
Difficulty: 1 Easy
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
264) Assuming Brunetti determines transaction price as the "expected value" of the variable consideration, what would be the appropriate transaction price for this contract?
Difficulty: 1 Easy
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
265) Assume Brunetti uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements. What would be the appropriate transaction price?
Difficulty: 1 Easy
Topic: Transaction price―Variable consid constraint
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
266) Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year.
Required:
(a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price.
(b) Assuming Omni-Resistor determines transaction price as the "expected value" of the variable consideration, calculate the transaction price.
(c) Assume Omni-Resistor uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price.
Difficulty: 2 Medium
Topic: Transaction price―Variable consid constraint; Transaction price―Expected value; Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Portelli will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it will receive the quarterly bonus.
• On May 5, Portelli learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Portelli revised its estimate downward to 40% that it would be entitled to receive the quarterly bonus.
• On June 30, Silvia notified Portelli that, for the quarter ended, there were four complaints associated with room cleanliness, so Portelli would receive the bonus. Two days later, Portelli received all payments due for all services rendered in the second quarter, including the bonus.
Portelli bases estimates of variable consideration on the most likely amount it expects to receive.
267) Prepare Portelli's April 30 journal entry to account for the revenue recognized in April.
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
268) Prepare Portelli's May 31 journal entry to record the revenue recognized in May, as well as any appropriate adjustments to the revenue that had been recognized in April.
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
269) Prepare Portelli's June 30 journal entry to record additional service revenue recognized, as well as the journal entry on July 2 to record the receipt of payment from Silvia.
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Romano. The contract specifies the service fee to be $15,000 per month, and all payments are to be made shortly after the end of each quarter. It also specifies that Romano will receive an additional quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that it will receive the quarterly bonus.
• On May 5, Romano learned that, during March, there were two complaints from customers related to room cleanliness. Based on this new information, Romano revised its estimate downward to 40% that it would be entitled to receive the quarterly bonus.
• On June 30, Silvia notified Romano that, for the quarter ended, there were four complaints associated with room cleanliness, so Romano would receive the bonus. Two days later, Romano received all payments due for all services rendered in the second quarter, including the bonus.
Romano bases estimates of variable consideration on the expected value of the consideration it expects to receive.
270) Prepare Romano's April 30 journal entry to account for the revenue recognized in April.
Difficulty: 2 Medium
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
271) Prepare Romano's May 30 journal entry to record the revenue recognized in May, as well as any appropriate adjustments to the revenue that had been recognized in April.
Difficulty: 3 Hard
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
272) Prepare Romano's June 30 journal entry to record additional service revenue recognized, as well as and the journal entry on July 2 to record the receipt of payment from Silvia.
Difficulty: 3 Hard
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Veras Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each month. In addition, Veras will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that it will remain free of accidents for the entire year.
• On March 20, three of the most senior drivers at Veras abruptly left. As a result, Veras had to hire inexperienced drivers to fill the vacant positions. Consequently, Veras revised its estimate to a 30% chance that it would be entitled to receive the semiannual bonus and decided to continue this 30% probability estimate until its six-month review at the end of June.
• On June 30, Moose confirmed that there was no accident between January and June, so Veras would be entitled to the semiannual bonus.
Veras bases estimates of variable consideration on the most likely amount it expects to receive.
273) Prepare Veras' January 31 journal entry to account for the revenue recognized from
January 1 – January 31.
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
274) Prepare Veras' March 31 journal entry to record the revenue recognized from
March 1 – March 31, as well as any appropriate adjustments to the revenue already presumed to have been recorded from January 1 – February 28.
Difficulty: 3 Hard
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
275) Prepare Veras' June 30 journal entry to account for cash received from Moose University. Include the revenue to be recognized for June 1 - June 30, as well as any necessary adjustments to revenue presumed to have been previously recorded.
Difficulty: 2 Medium
Topic: Transaction price―Most likely amount
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Terra Bus Transportation provides on-campus bus services for universities. On January 1, it enters into a one-year contract with Moose University to operate five bus lines traveling throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each month. In addition, Terra will receive an additional $120,000 at the end of each six-month period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that it will remain free of accidents for the entire year.
• On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra had to hire inexperienced drivers to fill the vacant positions. Consequently, Terra revised its estimate to a 30% chance that it would be entitled to receive the semiannual bonus and decided to continue this 30% probability estimate until its six-month review at the end of June.
• On June 30, Moose confirmed that there was no accident between January and June, so Terra would be entitled to the semiannual bonus.
Terra bases estimates of variable consideration on the expected value it expects to receive.
276) Prepare Terra's January journal entry to account for the revenue recognized from
January 1 - January 31.
Difficulty: 1 Easy
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
277) Prepare Terra's March 31 journal entry to record the revenue recognized from March 1 - March 31, as well as any appropriate adjustments to the revenue presumed already recorded from January 1 - February 28.
Difficulty: 3 Hard
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
278) Prepare Terra's June 30 journal entry to account for cash received from Moose University. Include the revenue to be recognized for June 1 - June 30, as well as any necessary adjustments to revenue presumed to have been previously recorded.
Difficulty: 3 Hard
Topic: Transaction price―Expected value
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
279) Riker receives $30,000 from Troy as payment for a vehicle that has a fair value of $40,000. The $30,000 constitutes full payment for the vehicle as specified in the sales contract. Assume that the time value of money is viewed as significant for this contract.
Required:
(a) Did Troy pay Riker before or after delivery of the vehicle?
(b) Prepare the journal entry Riker would make to record delivery of the vehicle, assuming no interest revenue or interest expense had been recorded previously.
(c) Prepare the journal entry Riker would make to record receipt of Troy's payment, assuming no interest revenue or interest expense had been recorded previously.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
280) Brenda receives $220,000 from Sandra as payment for goods that have a fair value of $190,000. The $220,000 constitutes full payment for the goods as specified in the sales contract. Assume that the time value of money is viewed as significant for this contract.
Required:
(a) Did Sandra pay Brenda before or after delivery of the goods?
(b) Prepare the journal entry Brenda would make to record delivery of the goods, assuming no interest revenue or interest expense had been recorded previously.
(c) Prepare the journal entry Brenda would make to record receipt of Sandra's payment, assuming no interest revenue or interest expense had been recorded previously.
Difficulty: 2 Medium
Topic: Transaction price―Time value of money
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
281) Assume that GM signs a contract to deliver 10 buses to the Tompkins Consolidated Area Transit (TCAT), which provides transit service throughout Tompkins County, for $4 million. Under the contract, TCAT makes a cash payment of $4 million to GM, and the 10 buses are shipped immediately from GM's existing inventory. At the same time, GM obtains the right to advertise its products on all of TCAT buses for six months, and makes a cash payment of $20,000 to GM for the advertising service. The fair value of the advertising service is $18,000.
Required:
Prepare the journal entries GM should record to account for the sale of the buses and the purchase of the advertisements. Indicate the amount of revenue GM should recognize for its sale of buses to TCAT.
Difficulty: 2 Medium
Topic: Transaction price―Pay by seller to customer
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
282) Typhoon Sons & Co. manufactures various types of golf clubs to third party vendors. On April 1, 2021, Typhoon delivers a large quantity of golf clubs to Resona Country Club. Under the sales agreement, Resona is obligated to pay Typhoon $200,000 within six months. On May 1, Typhoon purchases for cash the right to advertise its products during Resona's annual golf tournament event for $3,000. Resona normally charges $2,500 for such services. On August 15, Resona pays Typhoon all amounts owed.
Required:
Prepare the journal entries Typhoon should record to account for the transaction on April 1, May 1 and August 15. Indicate the amount of revenue that Typhoon should recognize on its sale of golf clubs to Resona.
Difficulty: 3 Hard
Topic: Transaction price―Pay by seller to customer
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
283) AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens and food service providers. One of its key customers is Home Kitchen & Co., which provides cafeteria solutions for corporations and universities. On January 1, 2021, AgriFoods obtained a one-year contract to supply a pre-specified amount of vegetables to Home Kitchen, and received $600,000 in cash. Then, on March 15, AgriFoods hired Home to run one of its employee cafeterias for a period of six months, from April to September, and paid $70,000 in cash. For similar arrangements, Home usually charged $50,000.
Required:
(a) Prepare the journal entries AgriFoods would record on January 1, 2021 and January 31, 2021 with respect to the sales contract. Assume revenue is accrued on a monthly basis.
(b) Prepare the journal entry to account for AgriFoods' purchase of Home's services.
Difficulty: 2 Medium
Topic: Revenue over time―Progress to completion; Transaction price―Pay by seller to customer
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.; 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.
284) Other competing sellers in the same region charge an average of $250 for a set of goggles and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5% discount compared to other shops, since it is a bit farther away from the ocean.
Required:
What would be Beaumont's stand-alone selling price of the goggles and the lessons, based on adjusted market assessment approach?
Difficulty: 2 Medium
Topic: Transaction price―Adjusted market approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
285) Typically, Beaumont incurs $375 on compensation and other costs to provide the private lessons, and earns an average of 40% profit over cost on service offerings.
Required:
Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the certified lessons based on the expected cost plus margin approach.
Difficulty: 2 Medium
Topic: Transaction price―Expected cost plus margin
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
286) Typically, if Beaumont were to sell the equipment only, it would ask for $2,000.
Required:
Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the lessons based on the residual approach.
Difficulty: 1 Easy
Topic: Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
287) CompuLand Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. The assembly service is offered by other vendors for $100 on average, and CompuLand typically charges approximately 20% more than other vendors for similar services on a stand-alone basis.
Required:
Estimate the stand-alone selling price of the assembly service using the adjusted market assessment approach.
Difficulty: 1 Easy
Topic: Transaction price―Adjusted market approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
288) CompuValue Center sells a full assortment of computer parts, including motherboards, video cards, and cables, and also offers complementary computer assembly services. CompuValue estimates that it incurs $50 in labor and materials on average to complete one assembly order, with an average of 75% profit based on cost.
Required:
Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the expected cost plus margin approach.
Difficulty: 2 Medium
Topic: Transaction price―Expected cost plus margin
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
289) CompuTime Center sells a full assortment of computer parts, including motherboards, video cards, and cables. It also offers complementary computer assembly services. A customer places an order for an advanced workstation, and CompuTime asks for $3,500. If CompuTime were to sell only the parts in an advanced workstation, with no assembly, the price would be $3,300.
Required: Assuming that computer parts and assembly service are separate performance obligations, estimate the stand-alone selling price of the assembly service based on the residual approach.
Difficulty: 1 Easy
Topic: Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
290) Bria Furniture sells bed frames and mattresses. One of its products is a premium therapeutic bed set produced by OmniSleep, which comes with a mattress and a bed frame. Bria offers a package consisting of the mattress, the frame, and on-site installation by its staff. All of these components can be sold separately, as often done by other vendors, so Bria concludes that these are separate performance obligations. Bria sells the OmniSleep package for $3,000. The mattress and the frame are sold separately for $2,000 and $900, respectively. Other vendors in the same area typically charge $200 for on-site installation. Bria does not sell on-site installation separately. On average, the prices charged by Bria are 10% higher than those of its competitors. Bria estimates that it incurs about $100 of compensation and other costs to provide the installation service. The profit margin over cost is estimated to be approximately 35%.
Required:
Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (c) the residual approach.
Difficulty: 2 Medium
Topic: Transaction price―Adjusted market approach; Transaction price―Expected cost plus margin; Transaction price―Residual approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
291) Mahogany Billiards sells upscale pool tables and related supplies. It sells a premium package consisting of a pool table imported from Europe, a full set of cues and balls, and on-site installation by its staff. Mahogany determines that each of these components is a performance obligation. Mahogany sells the pool table separately for $3,000 and the set of cues and balls for $1,000. The entire package is sold at $4,500. Mahogany does not offer on-site installation separately, as part of company policy. It also estimates that it incurs about $350 of compensation and other costs per each installation. Other competing vendors sell on-site installation separately for $450, on average. Mahogany typically earns a profit margin of 40% over cost, and its prices are generally 5% lower than those charged by competitors.
Required:
Estimate the stand-alone selling price of the installation service using (a) the adjusted market assessment approach, (b) the expected cost plus margin approach, and (c) the residual approach.
Difficulty: 2 Medium
Topic: Transaction price―Residual approach; Transaction price―Expected cost plus margin; Transaction price―Adjusted market approach
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
292) Assume that, on April 1, 2021, a customer visits MicrosoftStore.com and purchases Microsoft Windows 14 Ultimate for $170. Windows 14 Ultimate comes in a DVD format which the customer can use permanently, and Microsoft does not expect that its actions subsequent to April 1, 2021 will affect the value the customer obtains from using the software.
Required:
How much revenue should Microsoft recognize in 2021 with respect to this particular
transaction?
Difficulty: 1 Easy
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
293) Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software packages sells for $150 and contains pre-programmed tutorials on basic accounting concepts. Another product sells for $3,000 and contains Smith & Sons' archive of accounting standards and articles, which Smith & Sons updates on a weekly basis and downloads to archive users for the two years following purchase of the product.
Required:
If a customer purchases both software packages on June 1, 2021, how much revenue should Smith & Sons recognize for the year?
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
294) Berry Farm produces organic tomatoes and strawberries. In June 2021, it transported 100 boxes of strawberries with a price of $20 per box to the Bay Farmers' Market. Berry Farm paid an upfront fee of $100 to present its products at the market for one week, and the market earns a 25% profit margin on each item sold, but Berry Farm is responsible for any items that remain unsold at the end of the week.
Required:
The market was able to sell 65 boxes of strawberries to customers. How much revenue should Berry Farm recognize with respect to this transaction?
Difficulty: 2 Medium
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
295) Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine. In May 2021, it placed 100 freshly caught wild salmon with a retail price of $75 each in Joe's Fish Shop. Holmgren's contract with the shop stipulates that the shop will earn a 15% commission on each salmon sold. Joe's is responsible for purchasing any fish that remain unsold at the end of a three-day period.
Required:
During the three-day period, Joe's Fish Shop was able to sell 88 of the 100 salmon. How much revenue should Holmgren recognize with respect to this transaction?
Difficulty: 2 Medium
Topic: Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
296) Colombo Coffee sells gift cards that can be used at its 55 branches. During 2020, customers purchased $25,000 of gift cards, of which $3,000 were redeemed during 2021. It is estimated that a balance of $1,500 of cards sold in 2020 remains unused as of the end of 2021, and Colombo determines that this amount will never be redeemed, based on historical experience. During 2021, Colombo further sold $32,000 of gift cards, of which $26,000 were redeemed and $6,000 remain unused but may be used by customer in 2022.
Required:
How much gift card revenue should Colombo recognize in 2021?
Difficulty: 1 Easy
Topic: Timing of rev rec―Gift cards
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
297) Moretti Department Store sells gift cards that expire three years from the date of purchase. During 2019, Moretti sold $50,000 of gift cards, of which $1,500 were redeemed during 2021. At the end of 2021, it is estimated that approximately $800 of the 2019 balance remains unused, and Moretti concludes that it will never be redeemed. Moretti sold another $55,000 of gift cards in 2020, of which $22,000 were redeemed in 2021, and $60,000 of gift cards in 2021, of which $40,000 were redeemed in 2021.
Required:
How much revenue with respect to gift cards should Moretti recognize in 2021?
Difficulty: 2 Medium
Topic: Timing of rev rec―Gift cards
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Beck Construction Company began work on a new building project on January 1, 2020. The project is to be completed by December 31, 2022, for a fixed price of $108 million. The following are the actual costs incurred and estimates of remaining costs to complete the project that were made by Beck's accounting staff:
Years Actual costs incurred in each year Estimated remaining costs to complete the
project (measured at Dec. 31 of each year)
2020 $30 million $60 million
2021 $45 million $45 million
2022 $35 million $ 0
298) What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project upon completion of the project? Place answers in the spaces provided below and show supporting computations.
Gross Profit (or Loss)
Years recognized Supporting computations
2020
2021
2022
Difficulty: 2 Medium
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
299) What amount of gross profit (or loss) would Beck record on this project in each year, assuming that Beck recognizes revenue for this project over time according to percentage of completion? Place answers in the spaces provided below and show supporting computations.
Gross Profit (or Loss)
Years recognized Supporting computations
2020
2021
2022
Difficulty: 3 Hard
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use this information to answer the following questions:
Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,800,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:
2020 2021
Costs incurred during the year $ 450,000 $1,100,000
Estimated costs to complete 1,050,000 0
Billings during the year 400,000 1,400,000
Cash collections during the year 300,000 1,500,000
300) Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.
Required:
Compute the amount of gross profit recognized during 2020 and 2021.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
301) Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.
Required:
Prepare all journal entries to record costs, billings, collections, and profit recognition.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
302) Assume that Beavis recognizes revenue upon completion of the project.
Required:
Compute the amount of gross profit recognized during 2020 and 2021.
Difficulty: 2 Medium
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
303) Assume that Beavis recognizes revenue upon completion of the project.
Required:
Prepare all journal entries to record costs, billings, collections, and profit recognition.
Difficulty: 2 Medium
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
304) In 2021, Chicago Construction began work on a three-year construction project to build a new performing arts complex (the PAC). The PAC contract price is $150 million. Chicago recognizes revenue on this contract over time according to percentage of completion. At the end of 2021, the following financial statement information indicates the results to date for the PAC (missing items denoted by letter):
INCOME STATEMENT:
Revenue $ w million
Cost of construction 35 million
Gross profit $ x million
BALANCE SHEET:
Accounts receivable from construction billings $14 million
Construction in progress $50 million
Less: Billings on construction ($y million)
Net billings in excess of construction in progress $z million
CASH FLOW STATEMENT
Cash collections $46 million
Required:
Compute the following, placing your answer in the spaces provided and showing supporting computations below:
Item to compute Answer
Total revenue recognized during 2021 (w):
Gross profit recognized during 2021 (x):
Billings on construction (y):
Net billings in excess of construction in progress (z):
Calculate the percentage of PAC that was completed during 2021:
Difficulty: 3 Hard
Topic: Long-term contracts―Upon completion
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
305) In 2021, KP Building Inc. began work on a four-year construction project (called Cincy One). The contract price is $300 million. KP recognizes revenue on this contract over time according to percentage of completion. At the end of 2021, the following financial statement information indicates the results to date for Cincy One:
INCOME STATEMENT:
Gross profit (before-taxes) recognized in 2021 $22 million
BALANCE SHEET:
Accounts receivable from construction billings $10 million
Construction in progress $66 million
Less: Billings on construction ($75 million)
Net billings in excess of construction in progress $9 million
Required:
Compute the following, placing your answer in the spaces provided and showing supporting computations below.
Item to compute Answer
Cash collected by KP on Cincy One during 2021
Actual costs incurred by KP on Cincy One during 2021
At 12/31/2021, the estimated remaining costs to complete Cincy One
The percentage of Cincy One that was completed during 2021
Difficulty: 3 Hard
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Use this information to answer the following questions:
McCombs Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2020 and completed in 2021. Cost and other data are presented below:
2020 2021
Costs incurred during the year $1,500,000 $1,300,000
Estimated costs to complete 1,200,000 0
Billings during the year 1,200,000 1,300,000
Cash collections during the year 1,000,000 1,500,000
306) Assume that McCombs recognizes revenue on this contract over time according to percentage of completion.
Required:
Compute the amount of gross profit recognized during 2020 and 2021.
Difficulty: 2 Medium
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
307) Assume that McCombs recognizes revenue on this contract over time according to percentage of completion.
Required:
Prepare all journal entries to record costs, billings, collections, and profit (loss) recognition. Round your answers to the nearest whole dollar.
Difficulty: 3 Hard
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
308) Assume that McCombs recognizes revenue upon project completion.
Required:
Compute the amount of gross profit recognized by McCombs during 2020 and 2021.
Difficulty: 3 Hard
Topic: Long-term contracts―Loss on contract
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
309) Silica Corporation constructs highly specialized communication satellites. A customer in Hong Kong recently placed an order for a cable TV satellite at a price of $20 million. The order was placed in April 2021, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the end of 2021, regardless of progress or cancellation. Silica uses "proportion of time" as its measure of progress toward completion.
Required:
When should Silica recognize revenue: at completion, or as the construction is performed?
Difficulty: 1 Easy
Topic: Revenue over time―Criteria
Learning Objective: 06-03 Explain when it is appropriate to recognize revenue over a period of time.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
310) Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that covers any defects. When customers make a purchase, they also receive a coupon for 10 free engine oil changes and an option to change all of the tires for $50 after 30,000 miles. Typically, customers pay $25 for an oil change and $250 for a new set of tires.
Required:
(a) Given the information above, how many performance obligations exist in the contract to purchase a vehicle?
(b) Assume the same contract but that it offers customers an option to change all of the tires for $250 after 30,000 miles. How many performance obligations exist in the contract to purchase a vehicle?
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Warranties
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
311) Lexikon Pianos sells customized concert pianos throughout the U.S. Its grand concert piano sells for $200,000, which includes delivery and installation. The product comes with a two-year warranty that covers any product defects, and customers can choose to add an extended three-year warranty for maintenance and repair at a price of $2,000. Customers also get an option to upgrade traditional plastic keys to bone ones for an additional $20,000. The extended warranty would normally sell for $3,500, and the installation of bone keys carries a stand-alone price of $30,000.
Required:
(a) Given the information above, how many performance obligations exist in the contract to purchase a grand concert piano?
(b) Now, assume that the stand-alone price of the extended warranty is $2,000, and that of the bone key upgrade is $20,000. How many performance obligations exist in the contract to purchase a grand concert piano?
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig; Contract features―Warranties
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-05 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
312) Summerhill Construction builds luxury houses in remote areas. On June 1, 2021, the company signed a contract to build a house in an undeveloped section of a mountainside, and received $2 million in advance for the job. To complete the project, the company must construct a pathway leading to the building lot, clear a large hillside, and construct a wooden house. Normally, the company would charge $400,000, $1,400,000, and $500,000, respectively, for each of these tasks if done separately.
Required:
Given the information above, how many performance obligations are included in this
contract?
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig; Long-term contracts―Accounting issues
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
313) Optimus Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it obtained an order to build a three-lane swimming pool of 25 yards in length in the customer's backyard. Under the contract, Optimus is also obligated to install a water heater and a filtration system, which are necessary to make a swimming pool fully functional. Total price for the construction was $55,000. Each of these smaller components would typically cost $40,000, $10,000, and 20,000 if installed separately.
Required:
Given the information above, how many performance obligations are included in this
contract?
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
314) FlexMotors, Inc. manufactures a variety of electronic drills and grass cutters. Recently, it introduced a new line of handheld drills that generates much less noise and consumes much less energy, but carries a much higher price tag. The company is currently considering whether it should record $1.2 million of revenue upon shipment. Under the contract, FlexMotors is obligated to accept any products from the distributors if they are not sold within 6 months. The company is confident that the new model will sell, but is unable to accurately estimate returns, because it has never sold anything quite like it.
Required:
How much revenue should FlexMotors recognize upon shipment to distributors?
Difficulty: 2 Medium
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
315) Horowitz Paint Shop sold $3,000 of paint to a local construction company for cash on June 25, 2021. Because of a flood in the area, the customer requested that Horowitz not ship the items from its warehouse until July 3, 2021, so Horowitz set aside the paint on June 25, packaged and ready to ship on July 3.
Required:
For the second quarter ending on June 30, how much revenue should Horowitz recognize for the sale to the local construction company? Explain your answer.
Difficulty: 2 Medium
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
316) On December 28, 2021, Omega Steel, Inc. sold $100,000 of steel sheets to a car manufacturer. Due to holidays, Omega was unable to find a truck driver to deliver the product. Delivery was finally made on January 5, 2022.
Required:
How much revenue should Omega recognize in 2021 for the sale to the car manufacturer? Explain your answer.
Difficulty: 2 Medium
Topic: Timing of rev rec―Bill-and-hold
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
317) The following disclosure note appeared in a recent annual report to stockholders of Dell Inc., the computer manufacturer: "Net revenue includes sales of hardware, software and peripherals, and services (including extended service contracts and professional services). These products and services are sold either separately or as part of a multiple-element arrangement. Dell allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element, which is generally based on the relative list price of each element. For sales of extended warranties with a separate contract price, Dell defers revenue equal to the separately stated price. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Product revenue is recognized, net of an allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Revenue from extended warranty and service contracts, for which Dell is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract or when the service is completed. Revenue from sales of third-party extended warranty and service contracts, for which Dell is not obligated to perform, is recognized on a net basis at the time of sale."
Briefly explain why Dell Computer recognizes revenue at different times for (a) product sales, (b) extended warranty and service contracts for which Dell is obligated to perform, and (c) extended warranty and service contracts for which a third party is obligated to perform.
Difficulty: 3 Hard
Topic: Transfer of control and indicators; Revenue over time―Progress to completion; Contract features―Warranties; Transaction price―Principal or agent; Disclosures―Balance sheet and Notes
Learning Objective: 06-02 Explain when it is appropriate to recognize revenue at a single point in time.; 06-03 Explain when it is appropriate to recognize revenue over a period of time.; 06-04 Allocate a contract's transaction price to multiple performance obligations.; 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.; 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
318) Are the following separate performance obligations: prepayments, quality-assurance warranty, extended warranty, right of return? For each, indicate yes or no, and explain.
Difficulty: 2 Medium
Topic: Mult perf oblig―Identify the perf oblig
Learning Objective: 06-04 Allocate a contract's transaction price to multiple performance obligations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
319) Explain two approaches a seller can use to estimate variable consideration, and when each approach is likely to be more appropriate.
Difficulty: 2 Medium
Topic: Transaction price―Variable consideration
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
320) Are sellers ever constrained from including variable consideration in the transaction price used to estimate revenue? Explain, providing indicators of circumstances that could require that constraint.
Difficulty: 2 Medium
Topic: Transaction price―Variable consid constraint
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
321) Briefly describe at least two indicators that can be used to distinguish whether a seller is a principal or an agent according to GAAP.
Difficulty: 2 Medium
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
322) Explain the differences between how a principal and agent would show a sale of a product that has gross revenues of $1,000, cost of goods sold of $750, and a commission paid by the principle of 10% of gross sales on their respective income statements.
Difficulty: 2 Medium
Topic: Transaction price―Principal or agent
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
323) Explain briefly how a company who sells to distributors with a right of return might manage earnings if the company was falling short of profit projections. What sort of ethical problems could result from that earnings management?
Difficulty: 2 Medium
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Create
AACSB: Ethics; Communication
AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis
324) Many high-tech companies sell products with the opportunity for retailers to return the merchandise if it is unsold after a certain period. This reduces the retailer's risk of inventory obsolescence. Explain the implications on revenue recognition under this kind of policy. Include a specific example.
Difficulty: 3 Hard
Topic: Transaction price―Right of return
Learning Objective: 06-06 Understand how variable consideration and other aspects of contracts affect the calculation and allocation of the transaction price.
Bloom's: Create; Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
325) Briefly explain the circumstances in which license revenue is recognized over time versus at a point in time. Provide an example of each.
Difficulty: 2 Medium
Topic: Timing of rev rec―Licenses
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Create; Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
326) Briefly explain the circumstances that indicate the seller has a bill-and-hold sale and a consignment sale, and how that affects the timing of revenue recognition for each.
Difficulty: 2 Medium
Topic: Timing of rev rec―Bill-and-hold; Timing of rev rec―Consignment
Learning Objective: 06-07 Determine the timing of revenue recognition with respect to licenses, franchises, and other common arrangements.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
327) Briefly explain the difference between an account receivable, a contract asset, and a contract liability, with respect to balance sheet disclosure.
Difficulty: 2 Medium
Topic: Disclosures―Balance sheet and Notes; Long-term contracts―Accounting issues
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.; 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
328) What is the objective of disclosures about revenue recognition? Indicate at least two common types of important revenue recognition disclosures.
Difficulty: 2 Medium
Topic: Disclosures―Balance sheet and Notes
Learning Objective: 06-08 Understand the disclosures required for revenue recognition, accounts receivable, contract assets, and contract liabilities.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
329) Imagine that the Ace Construction Company (ACC) concludes that it must switch from recognizing revenue on long-term contracts over time according to percentage of completion to recognizing revenue upon completion of each contract. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the new approach (recognizing revenue upon contract completion) than they did under the old approach (recognizing revenue over time according to percentage of completion)? Explain.
Difficulty: 2 Medium
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
330) Briefly explain how a company that recognized revenue over time by estimating percentage of completion using a cost-to-cost ratio could manage earnings upward to meet a profit projection. What sort of ethical problems could result from that earnings management?
Difficulty: 2 Medium
Topic: Long-term contracts―Accounting issues
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Analyze
AACSB: Ethics; Communication
AICPA/Accessibility: BB Critical Thinking; FN Risk Analysis
331) Briefly explain how gross profit is recorded when revenue on long-term construction projects is recognized over time according to percentage of completion.
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
332) Under what circumstances can revenue on long-term construction contracts be recognized over time according to percentage of completion?
Difficulty: 2 Medium
Topic: Long-term contracts―Percentage complete
Learning Objective: 06-09 Demonstrate revenue recognition for long-term contracts, both at a point in time when the contract is completed and over a period of time according to the percentage completed.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Document Information
Connected Book
Answer Key + Test Bank | Intermediate Accounting 10e
By J. David Spiceland, Mark W. Nelson, Wayne Thomas